Rating agenciessuch as Standard & Poors Corporation (S&P), Moodys Investor Service, and Fitch Ratingsassign credit ratings to bonds based on both quantitative and qualitative factors. These ratings are considered indicators of the issuers default risk, which impacts the bonds interest rate and the issuers 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 bonds rating. The yield on the bond is likely to , and the bonds price will .

Assume you make the following investments:

	A $10,000 investment in a 10-year Treasury bond that yields 11.0%, and
	A $20,000 investment in a 10-year corporate bond with an BBB rating and a yield of 14.3%

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

4.9%

4.6%

3.6%

3.3%