11. Bond ratings Aa Aa Rating agencies-such as Standard & Poor's (S&P), Moody's Investor Service, and Fitch Ratings-assign credit ratings to bonds based on both quantitative and qualitative factors. These ratings are considered indicators of the issuer's default risk, which impacts the bond's interest rate and the issuer's cost of debt capital. Based on these ratings, bonds are classified into investment-grade bonds and junk bonds. Which of the following bonds is likely to be classified as an investment-grade bond? A bond whose issuer has a 30% return on capital, a total debt to total capital ratio of 15%, and a 6% yield. O A bond whose issuer has a 10% return on capital, a total debt to total capital ratio of 85%, and a 13% yield. You heard that rating agencies have downgraded a bond's rating. The yield on the bond is likely to decrease and the bond's price will increase Assume you make the following investments: • A $10,000 investment in a 10-year T-bond that yields 7.00%, and A $20,000 investment in a 10-year corporate bond with an BBB rating and a yield of 9.30% Based on this information, and the knowledge that the difference in liquidity risk premiums between the two bonds is 0.50%, what is your estimate of the corporate bond's default risk premium? 2.52% 2.30% 1.80% 3.06%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question
100%
11. Bond ratings
Aa Aa
Rating agencies-such as Standard & Poor's (S&P), Moody's Investor Service, and Fitch Ratings-assign credit ratings
to bonds based on both quantitative and qualitative factors. These ratings are considered indicators of the issuer's
default risk, which impacts the bond's interest rate and the issuer's cost of debt capital.
Based on these ratings, bonds are classified into investment-grade bonds and junk bonds. Which of the following
bonds is likely to be classified as an investment-grade bond?
A bond whose issuer has a 30% return on capital, a total debt to total capital ratio of 15%, and a 6% yield.
O A bond whose issuer has a 10% return on capital, a total debt to total capital ratio of 85%, and a 13% yield.
You heard that rating agencies have downgraded a bond's rating. The yield on the bond is likely to
decrease
and the bond's price will
increase
Assume you make the following investments:
• A $10,000 investment in a 10-year T-bond that yields 7.00%, and
A $20,000 investment in a 10-year corporate bond with an BBB rating and a yield of 9.30%
Based on this information, and the knowledge that the difference in liquidity risk premiums between the two bonds is
0.50%, what is your estimate of the corporate bond's default risk premium?
2.52%
2.30%
1.80%
3.06%
Transcribed Image Text:11. Bond ratings Aa Aa Rating agencies-such as Standard & Poor's (S&P), Moody's Investor Service, and Fitch Ratings-assign credit ratings to bonds based on both quantitative and qualitative factors. These ratings are considered indicators of the issuer's default risk, which impacts the bond's interest rate and the issuer's cost of debt capital. Based on these ratings, bonds are classified into investment-grade bonds and junk bonds. Which of the following bonds is likely to be classified as an investment-grade bond? A bond whose issuer has a 30% return on capital, a total debt to total capital ratio of 15%, and a 6% yield. O A bond whose issuer has a 10% return on capital, a total debt to total capital ratio of 85%, and a 13% yield. You heard that rating agencies have downgraded a bond's rating. The yield on the bond is likely to decrease and the bond's price will increase Assume you make the following investments: • A $10,000 investment in a 10-year T-bond that yields 7.00%, and A $20,000 investment in a 10-year corporate bond with an BBB rating and a yield of 9.30% Based on this information, and the knowledge that the difference in liquidity risk premiums between the two bonds is 0.50%, what is your estimate of the corporate bond's default risk premium? 2.52% 2.30% 1.80% 3.06%
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 1 images

Blurred answer
Knowledge Booster
Bond Credit Rating
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education