Bond Downgrade and Global Interaction of Bond Yields.
View the "Bonds" video (located at the "Video Vault" for Unit 2) and answer the following questions:
In the video you learn about a resort hotel developer in Miami who has issued $83 million worth of 6 year, 5% fixed-rate coupon bonds. At the time of the bond issue assume that the bonds had a rating of "AAA."
1. Soon after being issued, the bonds were downgraded (from AAA to BBB for example). Explain how the downgrading of the bonds affects each of these three parties:
a. the hotel developer (in terms of the coupon rate for new bond issues following the downgrading - will the rates for new issues be higher or lower or no change compared to before the downgrading),
b. the investors that currently hold the existing bonds (will the coupon rates on the existing bonds be higher or lower or no change compared to before the downgrading),
c. potential investors who would invest in the existing bonds after the downgrading (will the price of the bonds be lower, higher, or no change).