EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 6, Problem 30P
a.
Summary Introduction
To determine: The price of the bond if Andrew maintains the A rating for the bond issue.
Introduction:
Bond rating is a credit rating which represents the creditworthiness of both corporate and government bonds. Creditworthiness represents the ability to pay debt, or risk of getting default on a debt. Therefore, bond rating states the degree of risk associated with a bond. This rating is given by credit rating agencies like S&P, Moody, and so on.
b.
Summary Introduction
To determine: The price of the bond if it is downgraded.
Introduction:
Bond rating is a credit rating which represents the creditworthiness of both corporate and government bonds. Creditworthiness represents the ability to pay debt, or risk of getting default on a debt. Therefore, bond rating states the degree of risk associated with a bond. This rating is given by credit rating agencies like S&P, Moody, and so on.
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Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 4.35% (annual coupon payments) and a face value of $1,000. Andrew believes it can get a rating of A from Standard and Poor's. However, due to recent financial difficulties at the company, Standard and Poor's is warning that it may downgrade Andrew Industries bonds to BBB. Yields on A-rated long-term bonds are currently 3.85%, and yields on BBB-rated bonds are 4.25%.
a. What is the price of the bond if Andrew maintains the A rating for the bond issue?
b. What will the price of the bond be if it is downgraded?
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 5.09% (annual coupon payments) and a face value of $1,000. Andrew believes it can get a rating of A from Standard and Poor's. However, due to recent financial difficulties at the company,
Standard and Poor's is warning that it may downgrade Andrew Industries bonds BBB. Yields on A-rated, long-term bonds are currently 4.59%, and yields on BBB-rated bonds are 4.99%.
a. What is the price of the bond if Andrew maintains the A rating for the bond issue?
b. What will the price of the bond be if it is downgraded?
Access Ltd is financing a new investment and was previously unsuccessful to secure a similar interest rate as they had with their previous debt from their local Bank. Given their AAA credit rating, they instead decided to issue 5000 units of a 10-year bond to fund the investment. Coupon rate is set at 8% per annum and will be paid quarterly. The face value of one of the bonds is $1,000. The estimated yield for similar bonds of comparable risk rating is 12% per annum. Determine the market price of the one of the bonds.
Chapter 6 Solutions
EBK CORPORATE FINANCE
Ch. 6.1 - What is the relationship between a bonds price and...Ch. 6.1 - The risk-free interest rate for a maturity of...Ch. 6.2 - If a bonds yield to maturity does not change, how...Ch. 6.2 - Prob. 2CCCh. 6.2 - How does a bonds coupon rate affect its...Ch. 6.3 - How do you calculate the price of a coupon bond...Ch. 6.3 - How do you calculate the price of a coupon bond...Ch. 6.3 - Explain why two coupon bonds with the same...Ch. 6.4 - There are two reasons the yield of a defaultable...Ch. 6.4 - What is a bond rating?
Ch. 6.5 - Why do sovereign debt yields differ across...Ch. 6.5 - What options does a country have if it decides it...Ch. 6 - A 30-year bond with a face value of 1000 has a...Ch. 6 - Assume that a bond will make payments every six...Ch. 6 - The following table summarizes prices of various...Ch. 6 - Suppose the current zero-coupon yield curve for...Ch. 6 - Prob. 5PCh. 6 - Prob. 6PCh. 6 - Suppose a five-year, 1000 bond with annual coupons...Ch. 6 - Prob. 8PCh. 6 - Explain why the yield of a bond that trades at a...Ch. 6 - Prob. 10PCh. 6 - Prob. 11PCh. 6 - Consider the following bonds: Bond Coupon Rate...Ch. 6 - Prob. 14PCh. 6 - Prob. 17PCh. 6 - Prob. 18PCh. 6 - Prob. 19PCh. 6 - Prob. 20PCh. 6 - Prob. 22PCh. 6 - Prob. 23PCh. 6 - Suppose you are given the following information...Ch. 6 - Prob. 26PCh. 6 - Grumman Corporation has issued zero-coupon...Ch. 6 - The following table summarizes the yields to...Ch. 6 - Prob. 30PCh. 6 - Prob. 31PCh. 6 - A BBB-rated corporate bond has a yield to maturity...Ch. 6 - Prob. 33PCh. 6 - Prob. 34PCh. 6 - Prob. 35P
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