A firm with an AA rating likes to issue one million units of a 10 year-2% bond with face value $100. The yearly coupon payment is $2.40. After the financial crisis the firm is downgraded to a B+ rating. The yield curve is flat and the yield is 2% (per year). The default spreads are given in the table below. (a) What is the initial amount (before downgrading) the firm wants to raise? (b) How much can this now B+ rated firm raise by selling the same bond? (c) If the firm keeps the coupon rate and wants to raise the planned amount, how many more bonds does it issue?
A firm with an AA rating likes to issue one million units of a 10 year-2% bond with face value $100. The yearly coupon payment is $2.40. After the financial crisis the firm is downgraded to a B+ rating. The yield curve is flat and the yield is 2% (per year). The default spreads are given in the table below.
(a) What is the initial amount (before downgrading) the firm wants to raise?
(b) How much can this now B+ rated firm raise by selling the same bond?
(c) If the firm keeps the coupon rate and wants to raise the planned amount, how many more bonds does it issue?
(d) What is the additional interest payment per year the firm has to pay?
(e) Suppose the firm wants to raise the same total amount and adjusts the coupon payment so as to sell the bond for $100 each. What is the new coupon rate?
(f) What is the additional interest payment per year the firm has to pay?
Rating Default spread
AAA 0.20%
AA 0.40%
A+ 0.60%
A 0.80%
A- 1.00%
BBB 1.50%
BB+ 2.00%
BB 2.50%
B+ 3.00%
B 3.50%
B- 4.50%
CCC 8.00%
CC 10.00%
C 12.00%
D 20.00%
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