Credit Rating Agencies Problem Markets and Institutions

We would save $50,000,000 ($50 million) in interest expense in total over the next 10 years.

Work:

interest expense savings = $1 billion*(interest rate on AA – interest rate on AAA)*10 years

Interest expense savings = $1 billion*(3.50% - 3.00%)*10 years

Interest expense savings = $1 billion*(0.50%)*10 years

Interest expense savings = $1,000,000*0.50%*10

Interest expense savings = $1,000,000,000*0.50%*10

Interest expense savings = $5,000,000*10

Interest expense savings = $50,000,000

Thus, we would save $50,000,000 ($50 million) in interest expense in total over the next 10 years.


Additional interest expense = $200 million

(Additional interest expense = $200,000,000)

Work:

Additional interest expense = $1 billion*(interest rate on BB – interest rate on BBB)*10 years

Additional interest expense = $1 billion*(7.50% - 5.50%)*10 years

Additional interest expense = $1 billion*(2%)*10 years

Additional interest expense = $1 billion*20%

Additional interest expense = $200 million


Answer) at most the company management is willing to bribe them $200 million

This question is connected to part B.

If the rating is upgraded from BB to BBB then we would have to pay $200 million less in interest over the next 10 years.

Thus at most the company management is willing to bribe them $200 million