Question

11. Bond ratings 

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 a junk bond? 

A bond with a BBB rating, a 14% return on capital, a 42% total debt to total capital, and a 10% yield. 

A bond with a B rating, an 11% return on capital, a 87% total debt to total capital, and a 26% yield. 

You heard that rating agencies have upgraded a bond's rating. The yield on the bond is likely to ______, and the bond's price will ______.

 Assume you make the following investments: 

A $10,000 investment in a 10-year Treasury bond that yields 8.0%, and 

A $20,000 investment in a 10-year corporate bond with an BBB rating and a yield of 10.4% 

Based on this information, what is your estimate of the corporate bond's default risk premium?

 2.6% 2.4% 3.4% 3.6%

Answer 1

Ans 1	Correct answer is option :
	A bond with a B rating, and 11% return on capital, a 87% total debt to total capital, and a 26% yield.
Ans 2	The yield on the bond is likely to DECREASE and bond price will INCREASE
Ans 3	Correct answer is option : 2.4%