Answer:
The numbers are missing, so I looked for a similar question to fill in the blanks:
<em>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 6.43%, and yields on BBB-rated bonds are 6.84%.
</em>
a. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue?
if the YTM is 6.43%, then the market price will be:
0.0643 = {71.30 + [(1,000 - M)/30]}/ [(1,000 + M)/2]
0.0643 x [(1,000 + M)/2] = 71.30 + [(1,000 - M)/30]
0.0643 x (500 + 0.5M) = 71.30 + 33.33 - 0.03333M
32.15 + 0.03215M = 104.63 - 0.03333M
0.06548M = 72.48
M = 72.48 / 0.06548 = $1,106.90
b. What will be the price of the bond if it is downgraded?
if the YTM is 6.84%, then the market price will be:
0.0684 = {71.30 + [(1,000 - M)/30]}/ [(1,000 + M)/2]
0.0684 x [(1,000 + M)/2] = 71.30 + [(1,000 - M)/30]
0.0684 x (500 + 0.5M) = 71.30 + 33.33 - 0.03333M
34.20 + 0.0342M = 104.63 - 0.03333M
0.06753M = 70.43
M = 70.43 / 0.06753 = $1,042.94
