Your firm is considering issuing a 20-year bond to fund a large product expansio

Question

Your firm is considering issuing a 20-year bond to fund a large product expansion project.

Existing bonds of your firm have a credit rating of AA and a credit spread of 60 basis points (0.60%). With the new debt, you are concerned the credit rating of your firm may be downgraded to A

Given the yield information in the table below, how much additional yield will investors require if your bonds are downgraded from AA to A?

Enter your answer in percent format with 2 decimals.

ANSWER:

Bond Yields (%) 3 Yr 5 Yr 10 Yr 20 Yr 30 Yr+ U.S. Treasuries 0.99 1.29 1.64 1.97 2.28 Corporates (AAA) 1.16 1.61 2.37 3.28 3.86 Corporates (AA) 1.27 1.67 2.37 3.59 3.76 Corporates (A) 1.83 2.12 3.37 4.15 4.20

Explanation / Answer

As rating is downgraded from AA to A, the yield will increase from 3.59% to 4.15% (SEE 20 YR BOND YIELDS, RATING AA AND RATING A ROW)

so investors will require = 4.15% - 3.59% = 0.56% additional yield

ANSWER : 0.56%

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