Deutsche Bank Sees No Material Impacton Moody's Cut

Source: Lead Story-Dateline:Kirchfeld, Aaron,"Deutsche Bank Sees No Material Impacton Moody'sCut,"

Bloomberg.com, http://www.bloomberg.com/apps/news?pid=20601208&sid=alnC4pSPG12M,

posted 3/4/2010.

Moody's Investors Service, a bondrating agency, downgraded DeutscheBank AG's debt after reassessingthe bank's exposure toloss. Moody's citedthe bank's"continuing preponderance of capitalmarket activities" as one of the primary reasons for the downgrade. Other activities also producedgreater "earningsvolatility" than originally anticipated.

Deutsche Bank acknowledged the downgrade but maintains the change will haveno "materialimpact" onthe company's operations. A bank spokesman indicated that funding costs should remain constant sincethe company's earnings are expected to set a new record of 10 billion euros in 2011.

Thinking Critically Questions

1. A credit downgrade typically results in_________ interest rate for new debt.

A.

a higher

B.

no change in

C.

not enough information to tell

D.

a lower

2. Thereis a(n)_________ relationship between the price of an outstanding bond and market interest rates.

A.

positive

B.

none of the above

C.

inverse

D.

direct

3. The greater the volatility of earnings the______________ the bond rating when everything else is held constant.

A.

volatility is irrelevant when evaluating earnings

B.

higher

C.

there is no relationship between earnings and bond rating.

D.

lower