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Luther Industries needs to raise $25 million to fund a newoffice complex. The company plans to issue 10-year maturity bondswith a face value of $1000 and a coupon rate of 7.0% paid annually.The following table summarizes the YTM for ten-year corporate bondsof various credit ratings:RATINGAAAAAABBBBBYTM(%)6.70%6.80%7.00%7.40%8.00%a) Luther anticipates an A rating. However, a BBB rating ispossible. How much more in interest will Luther have to pay eachyear if its debt is rated BBB as opposed to A?b) Assume the bonds are issued with a coupon rate of 7% paidannually and with a BB rating. What total face value must be issuedin order to raise the needed funds (i.e., $25 million)?
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