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Rating agencies-such as Standard & Poor's (S&P), Moody's Investor Service, and the Dominion Bond Rating Service (DBRS)-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? O A bond with 10% return on assets, total debt to total capital of 85%, and 13% yield O A bond with 30% return on assets, total debt to total capital of 15%, and 6% 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 increase decrease Assume you make the following investments: A $10,000 investment in a 10-year government bond that has a yield of 10.5% A $20,000 investment in a 10-year corporate bond with an Baa rating and a yield of 13.7% Based on this information, what is your estimate of the corporate bond's default risk premium? O 3.2% O 4.8% 4.5% O 3.5% The higher the risk of a security, the higher its expected return will be. A bond's risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The following graph shows the relationship between interest rates and maturity for three security classes: Government of Canada securities (GCSS), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the dropdown menus to label each security's profile correctly: YIELD [%] 15 12 9 6 BBB GSC AA 3 0 5 10 15 20 25 30 YEARS TO MATURITY Is the default spread between the corporate bonds and the Treasury securities greater for shorter or longer maturities? Short-term maturities Long-term maturities The following bond list is from the business section of a newspaper on January 1, 2012. Notice that each bond shown matures on January 1 in 5, 10, or 30 years. Each bond shown pays a semiannual coupon-the coupon rate is in the column labelled Coupon. The Last Price and Yield to Maturity columns indicate each bond's price and YTM at the end of trading. EST Spread indicates the bond's spread above the relevant Government of Canada benchmark bond, expressed as a percentage. GCT indicates the maturity of the relevant Government of Canada benchmark bond for each bond listed. Notice also that prices are stated relative to a par value of $100. Assume all bonds have the same default premium. Fill in the nominal YTM for Pickman Inc.'s bonds. Last Yield to EST GCT Company Coupon Maturity Price Maturity Spread (Years) Schubert Inc. 8.13% 01-01-2022 $82.25 11.11% 6.20 10 Chapman Inc. 9.63% 01-01-2042 $95.09 10.15% 7.15 30 Rust Inc. 4.50% 01-01-2017 $95.18 5.62% 1.37 5 Murphy & Co. 5.38% 01-01-2017 $101.02 5.14% 0.89 5 Pickman Inc. 7.75% 01-01-2022 $94.61 3.65 10 8.92% 8.56% 8.80% If Chapman Inc. wants to issue new 30-year bonds today, what coup 8.68% uld the bonds have to pay to be If Chapman Inc. wants to issue new 30-year bonds today, what coupon rate would the bonds have to pay to be issued at par? 0 12.58% 11.65% O 12.05% O 10.15% Which bond is trading at a premium? Murphy & Co. O Schubert Inc. O Pickman Inc. Rust Inc. The following table represents a bond list from a financial reporting service website: Bond Yield Spreads Medium Term 5 year Yield (%) Government of Canada 2.60 CIBC 3.35 The spread on the CIBC bond is 0.44% 0.67% 0.58% The spread on the CIBC bond is 0.44% 0.67% 0.58% 0.44% 0.75% Flash Player MAC 32.0.0.453
