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%
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
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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%
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