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    Bond Scenario and Outline

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    The value of a bond depends on the timing, size, and riskiness of its future cash flows. Last year S&P cut GM's rating to "Junk." What effect will this have on the value of their existing bonds? How about future bond issues? Also how do we calculate the value of a bond? How about the value of a stock? Please provide an illustration in your response.

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    BOND SCENERIO AND OUTLINE
    The value of a bond depends on the timing, size, and riskiness of its future cash flows. Last year S&P cut GM's rating to "Junk." What effect will this have on the value of their existing bonds? How about future bond issues? Also how do we calculate the value of a bond? How about the value of a stock? Please provide an illustration in your response.

    r = r* + IP + DRP + MRP + LP
    r* = real risk-free rate of return
    IP = inflation premium. This is the annual average expected inflation over the life of the bond
    DRP = default risk premium is the additional return of the debt to reflect the default risk of the issuer.
    MRP = maturity risk premium
    LP = liquidity premium, which reflects the liquidity or ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what effect will this have on the value of their existing bonds, bond value, and stock value.

    $2.19

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