Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds wereissued 5 years ago at their $1000 per value and have exactly 25 years remaining until they mature.They have an 8% coupon interest rate, are convertible into 50 shares of common stock, and can be
called any time at $1080.the bond is rated Aa by Moody’s. Atilier Industries, a manufacturer of
sporting goods, recently acquired a small athletic-wear company that was in financial distress. As
a result of the acquisition, Moody’s and other rating agencies are considering a rating change for
Atilier bonds. Recent economic data suggest that the inflation, currently at 5% annually, is likely toincrease to a 6% annual rate.
Annie remains interested in the Atilier bond is concerned about inflation, a potential ratingchange, and maturity risk. In order to get a feel for the potential impact of these factors on thebond value, she decided to apply the valuation techniques she learned in her financial course.