A casino is considering issuing 500 $1,000 face value bond with a 30-year maturi
ID: 2632748 • Letter: A
Question
A casino is considering issuing 500 $1,000 face value bond with a 30-year maturity and a coupon rate of 7.0000% p.a. paying annual coupons. The casino currently has a Standard & Poors A rating. However, due to recent financial difficulties at the casino, Standard & Poors is warning that it may downgrade the rating to BBB. The yield on A-rated, 30-year bonds is currently 6.5000% and the yield on BBB-rated bonds is 6.9000%.
A. what is the price of these bonds if the casino's bond rating is down graded to BBB? The answer = 1012.53 but how do I find it?
B. what will the price of these bonds be if the casino maintains the A-rating? I know its 1065.29 but how do I find it?
Explanation / Answer
A
P= 70PVIFA(6.9%,30)+1000PVIF(6.9%,30)
= (70x12.5347)+(1000x.1351)
= $1012.53
B.
P= 70PVIFA(6.5%,30)+1000PVIF(6.5%,30)
= (70x13.0587 )+(1000x.1512)
= $ 1065.29
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