Chapter 6, Problem 6.3C

Summary Introduction

To discuss: Whether the bond rating considers default risk

Introduction:

A bond refers to the debt securities issued by the governments or corporations for raising capital. The borrower does not return the face value until maturity. However, the investor receives the coupons every year until the date of maturity.

A bond rating assesses the creditworthiness of the borrowing company. In other words, it is the likeliness of the borrowers’ default in repaying the money.