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Bond ratings Rating agencies - such as Standard & Poor's ( S&P ) , Moody's Investor Service, and the Dominion Bond Rating Service ( DBRS

Bond ratings
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?
A bond with 10% return on assets, total debt to total capital of 85%, and 13% yield
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
Assume you make the following investments:
A $10,000 investment in a 10-year government bond that has a yield of 5.5%
A $20,000 investment in a 10-year corporate bond with an AA rating and a yield of 7.2%
Based on this information, what is your estimate of the corporate bond's default risk premium?
1.7%
2.6%
2.4%
1.9%
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