Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

thank you Table 1 Annual default rates by debt rating (1993-2011) AAA AA A BBB B CCC 0% 0.1% 0.2% 0.5% 2.2% 5.5% 12.2% 0%

thank you
image text in transcribed
Table 1 Annual default rates by debt rating (1993-2011) AAA AA A BBB B CCC 0% 0.1% 0.2% 0.5% 2.2% 5.5% 12.2% 0% 1% 3% 3% 8% 16% 48% BB Average In Recessions CC-C 14.1% 79% By Rating Avg, Beta By Maturity Avg. Beta CCC 0.31 A and above BBB BB B 15 Year 0.14 6. The Dunley Corp. plans to issue 5-year bonds. It believes the bonds will have a BBB rating. Suppose AAA bonds with the same maturity have a 4% yield. Assume the market risk premium is 5% and use the data in Table 1 and Table 2. Use AAA rate as risk free rate. a. Estimate the yield Dunley will have to pay, assuming an expected 50% loss rate in the event of default during average economic times. What spread over AAA bonds will it have to pay? b. Estimate the yield Dunley would have to pay if it were a recession, assuming the expected loss rate is 71% at that time, but the beta of debt and market risk premium are the same as in average economic times. What is Dunley's spread over AAA now? In fact, one might expect risk premia and betas to increase in recessions. Redo part (b) assuming that the market risk premium and the beta of debt both increase by 20%; that is, they equal 1.2 times their value in recessions. c

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Marketing For Financial Advisors

Authors: Eric Bradlow, Keith Niedermeier, Patti Williams

1st Edition

0071605142, 978-0071605144

More Books

Students also viewed these Finance questions