Business, 15.02.2020 04:48 shay4341

A firm with an A rating plans to issue one million units of a 10 year-4% bond with face value $100. After the financial crisis this firm is downgraded to a B rating. The yield curve increases 0.2% per year. The yield for year 1 is y1=1%, for year 2 is y2=1.2%, y3=1.4% and so on and y10=2.8%. 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?

(c) If the firm wants to raise the planned amount, how many more bonds does it issue?

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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A firm with an A rating plans to issue one million units of a 10 year-4% bond with face value $100....

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