Assignment 07-Bonds and Their Valuation Due on Tomorrow at 1 1:59 PM PST Attempt
ID: 2806116 • Letter: A
Question
Assignment 07-Bonds and Their Valuation Due on Tomorrow at 1 1:59 PM PST Attempts: Keep the Highest: 4 10. 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 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 and the bond's price will Assume you make the following investments: · A $10,000 investment in a 10-year T-bond that yields 8.50%, and · A $20,000 investment in a 10-year corporate bond with an BBB rating and a yield of 10.80%Explanation / Answer
1) Choose first option. Second option will be classified as junk due to high debt.
2)Increase, Fall
3)Default risk premium= 10.8%-8.5%-0.4%=1.9%
Third option is correct.