Considering investing in the bonds

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Reference no: EM131346475

Annie Hegg has been considering investing in the bonds of Atilier Industries, a manufacturer of sporting goods. The bonds were issued 5 years ago with an 8% coupon interest rate and a $1,000 par value and have exactly 25 years remaining until they mature. The bond is rated Aa by Moody’s. Atilier Industries recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody’s and other rating agencies are considering a rating change for Atilier bonds. Annie remains interested in the Atilier bond but is concerned the potential rating change. In order to get a feel for the potential impact of this factor on the bond value, she decided to apply the valuation techniques she learned in her finance course. a. If the Atilier bonds are downrated by Moody’s from Aa to A, and if such a rating change will result in an increase in the required return from 8% to 8.75%, what impact will this have on the bond value, assuming semi-annual interest? b. Assume that Annie buys the bond at its current closing price of 980.38 and holds it until maturity. What will her yield to maturity (YTM) be, assuming semi-annual interest?

Reference no: EM131346475

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