ndrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7.13% (annual coupon payments) and a face value of $1,000. Andrew believes it can get a rating of A from Standard & Poor's. However, due to recent financial dificulties at the company, Standard & Poor's is warning that it may downgrade And ndustries' bonds to BBB. Yields on A-rated, long-term bonds are currently 6.49%, and yields on BBB-rated bonds are 6.87%. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue? What will be the price of the bond if it is downgraded? .What is the price of the bond if Andrew Industries maintains the A rating for the bond issue? Andrew maintains the A rating for the bond issue, the price of the bond is S (Round to the nearest cent.) What will be the price of the bond if it is downgraded? it is downgraded, the new bond's price will be $ (Round to the nearest cent.)
ndrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7.13% (annual coupon payments) and a face value of $1,000. Andrew believes it can get a rating of A from Standard & Poor's. However, due to recent financial dificulties at the company, Standard & Poor's is warning that it may downgrade And ndustries' bonds to BBB. Yields on A-rated, long-term bonds are currently 6.49%, and yields on BBB-rated bonds are 6.87%. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue? What will be the price of the bond if it is downgraded? .What is the price of the bond if Andrew Industries maintains the A rating for the bond issue? Andrew maintains the A rating for the bond issue, the price of the bond is S (Round to the nearest cent.) What will be the price of the bond if it is downgraded? it is downgraded, the new bond's price will be $ (Round to the nearest cent.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
![### Bond Pricing and Rating Downgrade Analysis
#### Scenario Description:
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7.13% (annual coupon payments) and a face value of $1,000. Andrew believes it can get a rating of A from Standard & Poor's. However, due to recent financial difficulties at the company, Standard & Poor's is warning that it may downgrade Andrew Industries' bonds to BBB. Yields on A-rated, long-term bonds are currently 6.49%, and yields on BBB-rated bonds are 6.87%.
#### Questions:
a. **What is the price of the bond if Andrew Industries maintains the A rating for the bond issue?**
b. **What will be the price of the bond if it is downgraded?**
---
### Question Analysis
#### a. **What is the price of the bond if Andrew Industries maintains the A rating for the bond issue?**
If Andrew maintains the A rating for the bond issue, the price of the bond is:
\[ \_\_\_ \]
(Round to the nearest cent.)
#### b. **What will be the price of the bond if it is downgraded?**
If it is downgraded, the new bond's price will be:
\[ \_\_\_ \]
(Round to the nearest cent.)
---
### Step-by-Step Solution Guide
#### Explanation:
To solve the above questions, one needs to understand the concepts of bond pricing. Specifically, the bond pricing formula is used to calculate the present value of future cash flows (interest payments) from a bond.
1. **Bond Pricing Formula:**
The price of a bond (P) can be calculated using the following formula:
\[
P = \left(\frac{C}{1+r}\right) + \left(\frac{C}{(1+r)^2}\right) + ... + \left(\frac{C}{(1+r)^n}\right) + \left(\frac{F}{(1+r)^n}\right)
\]
where:
- \( C \) is the annual coupon payment.
- \( r \) is the yield (current market interest rate).
- \( n \) is the number of years to maturity.
- \( F \) is the face value of the bond.
2. **Calculating the Coupon Payment:**
With a coupon rate](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6b2d2087-0413-432e-842b-e7bfa6e336f7%2Fbbc37424-3aaa-44fb-9665-5e78afee82c2%2F5w779jp_processed.png&w=3840&q=75)
Transcribed Image Text:### Bond Pricing and Rating Downgrade Analysis
#### Scenario Description:
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7.13% (annual coupon payments) and a face value of $1,000. Andrew believes it can get a rating of A from Standard & Poor's. However, due to recent financial difficulties at the company, Standard & Poor's is warning that it may downgrade Andrew Industries' bonds to BBB. Yields on A-rated, long-term bonds are currently 6.49%, and yields on BBB-rated bonds are 6.87%.
#### Questions:
a. **What is the price of the bond if Andrew Industries maintains the A rating for the bond issue?**
b. **What will be the price of the bond if it is downgraded?**
---
### Question Analysis
#### a. **What is the price of the bond if Andrew Industries maintains the A rating for the bond issue?**
If Andrew maintains the A rating for the bond issue, the price of the bond is:
\[ \_\_\_ \]
(Round to the nearest cent.)
#### b. **What will be the price of the bond if it is downgraded?**
If it is downgraded, the new bond's price will be:
\[ \_\_\_ \]
(Round to the nearest cent.)
---
### Step-by-Step Solution Guide
#### Explanation:
To solve the above questions, one needs to understand the concepts of bond pricing. Specifically, the bond pricing formula is used to calculate the present value of future cash flows (interest payments) from a bond.
1. **Bond Pricing Formula:**
The price of a bond (P) can be calculated using the following formula:
\[
P = \left(\frac{C}{1+r}\right) + \left(\frac{C}{(1+r)^2}\right) + ... + \left(\frac{C}{(1+r)^n}\right) + \left(\frac{F}{(1+r)^n}\right)
\]
where:
- \( C \) is the annual coupon payment.
- \( r \) is the yield (current market interest rate).
- \( n \) is the number of years to maturity.
- \( F \) is the face value of the bond.
2. **Calculating the Coupon Payment:**
With a coupon rate
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