Discuss how default risk, bond ratings and bond prices are related. Please be specific and complete....
Discuss how default risk, bond ratings and bond prices are related. Please be specific and complete. Describe three things that could affect a bond’s rating
Homework Answers
Higher default risk increases YTM and decreases price of
bond.Lower default risk decreases YTM and increases price of
Bond.
Downgrading bond rating increases YTM and decreases price of bond,
upgrading bond rating decreases YTM and increases price of
Bond.
Three things that affect a bond's rating:
1. The debt ratio or leverage in the company. Higher debt ratio
increases risk in the firm and hence decreases the bond rating of
the firm.
2. The Debt coverage ratios and interest coverage provide
information about the debt repaying capacity of company. Higher the
ratios the bond will be rated higher.
3. The profitability also affects bond rating. Lowering profit
decreases bond rating and increasing profit ratios increases bond
ratings.
Add Answer to:
Discuss how default risk, bond
ratings and bond prices are related.
Please be specific and complete....
5. Why are bond ratings important? A. A bond rating is an indicator of its default...
5. Why are bond ratings important? A. A bond rating is an indicator of its default risk, has a direct influence on the bond’s interest rate and the firm’s cost of debt B. Higher-grade bonds have a higher required rate of return C. Institutional bond holders are usually not allowed to buy bonds who ratings are below BBB D. A and C above
Bond ratings classify bonds based on: interest rate, inflation rate, and default risk. liquidity, interest rate,...
Bond ratings classify bonds based on: interest rate, inflation rate, and default risk. liquidity, interest rate, and default risk. liquidity, market, and default risk. default risk only. default and liquidity risks.
31) What is default risk? How is it different from default risk premium? Describe two ways...
31) What is default risk? How is it different from default risk premium? Describe two ways an investor can evaluate a bond issuer’s risk of default. （Please explain in details, the more the better）
Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the...
Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the yield of a bond? In you opinion, should an individual or a company stay away from one specific risk compared to the others?
How is default risk different from default risk premium?Describe two ways an investor can evaluate a...
How is default risk different from default risk premium?Describe two ways an investor can evaluate a bond issuer's risk of default.
1) Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect...
1) Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the yield of a bond? 2) Define what is meant by interest rate risk. Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction? 3) Normally, the Treasury yield curve is upward-sloping. Explain the conditions required...
Just the answer please 13. Bonds with relatively low risk of default are called securities and...
Just the answer please
13. Bonds with relatively low risk of default are called securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called A) investment grade; lower grade B) investment grade; junk bonds C) high quality; lower grade D) high quality; junk bonds 14. Junk bonds, bonds with a low bond rating, are also known as A) high-yield bonds. B) investment grade bonds....
1. What is "risk in a financial sense. What is it that creates risk for companies? Please be specific. (3 pts.)...
1. What is "risk in a financial sense. What is it that creates risk for companies? Please be specific. (3 pts.) 2. Pick one of the 'subareas' of finance and provide an of what is involved in that subarea. (3 pts.) 3. Describe the role that ethics should play in finance. How do "fiduciary relationships affect this? (3 pts.) 4. Why do companies usually go through a "life-cycle" where they start out as sole proprietorships and then eventually become corporations....
Discuss how contractionary monetary policy impacts the equilibrium interest rate without talking about bond prices using...
Discuss how contractionary monetary policy impacts the equilibrium interest rate without talking about bond prices using the graph of the money market equilibrium developed in chapter 4. Please draw it out.
Slice & Dice Investment Co. - zero coupon bonds that have no risk of default
The Slice & Dice Investment Co. needs some help understanding the intricacies of bond pricing. It has observed the following prices for zero coupon bonds that have no risk of default:MaturityPrice per $1 Face Value1 year$0.972 years0.903 years0.81How much should Slice & Dice be willing to pay for a three-year bond that pays a 6-percent coupon, assuming annual coupon payments start one year from now?What is the yield to maturity of the three-year coupon bond?Suppose Slice & Dice purchases this...
1) Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the yield of a bond? 2) Define what is meant by interest rate risk. Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction? 3) Normally, the Treasury yield curve is upward-sloping. Explain the conditions required...
Just the answer please
13. Bonds with relatively low risk of default are called securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called A) investment grade; lower grade B) investment grade; junk bonds C) high quality; lower grade D) high quality; junk bonds 14. Junk bonds, bonds with a low bond rating, are also known as A) high-yield bonds. B) investment grade bonds....
1. What is "risk in a financial sense. What is it that creates risk for companies? Please be specific. (3 pts.) 2. Pick one of the 'subareas' of finance and provide an of what is involved in that subarea. (3 pts.) 3. Describe the role that ethics should play in finance. How do "fiduciary relationships affect this? (3 pts.) 4. Why do companies usually go through a "life-cycle" where they start out as sole proprietorships and then eventually become corporations....
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