11. Bond ratings Rating agencies such as Standard & Poor's Corporation(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 B rating, an 11% return on capital, a 87% total debt to total capital, and a 26% yield. A bond with a BBB rating, a 14% return on capital, a 42% total debt to total capital, and a 10% 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 9.00%, and A $20,000 investment in a 10-year corporate bond with an AA rating and a yield of 10.20% Based on this information, and the knowledge that the difference in liquidity risk premiums between the two bonds is 0.30%, what is your estimate of the corporate bond's default risk premium? 0.90% 1.20% 1.26% 1.53% 13. Bond listings and yield spreads The following bond list is from the business section of a financial newspaper on January 1, 2016. Assume 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 Last Yield columns indicate each bond's price and YTM at the end of trading. EST Spread indicates the bond's spread above the relevant U.S. Treasury benchmark, expressed as a percentage. UST indicates which U.S. Treasury security maturity is the relevant benchmark for each bond. EST Volume shows the number of bonds traded during the day. Notice also that prices are stated relative to a par value of $100. Assume all bonds have the same default premium. Fill in the value of Virtucon Co.'s bonds. Last Yield Coupon 8.25% Last Price $97.87 EST Spread 2.37 UST (Years) 10 Maturity 01-01-2026 01-01-2021 01-01-2026 8.57% 5.98% 5.80% $99.22 0.58 Company Vandelay Inc. Global Corp. Widget Corp. Wizard Co. Virtucon Co. 5 EST Volume (1000s) 59,725 52,930 46,932 45,120 43,960 8.98% $104.07 8.37% 2.17 10 9.63% 01-01-2046 588.14 10.98% 4.03 30 4.13% 01-01-2021 6.26% 0.86 5 If you were to calculate the yield on a security with a 10-year U.S. Treasury security, the yield will be equal to Which bond is trading at a premium? O Vandelay Inc. Virtucon Co. Global Corp. Widget Corp