A firm with an AA-rating plans to issue one million shares of a 4 year-10% bond with face value $100. After the financial crisis this firm is downgraded to a B rating. The risk free rate is 1%. 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+ 3.25%
B 4.00%
B- 6.00%
CCC 8.00%
CC 10.00%
C 12.00%
D 20.00%