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 $5\mathrm{.}5\%$

A $$20,000$ investment in a $10-$year corporate bond with an AA rating and a yield of $7\mathrm{.}2\%$

Based on this information, what is your estimate of the corporate bond's default risk premium?

$1\mathrm{.}7\%$

$2\mathrm{.}6\%$

$2\mathrm{.}4\%$

$1\mathrm{.}9\%$