What Is Credit Rating?

1. To begin, assume that it is now January 1, 1993, and that each bond in Table 1 matures on December 31 of the year listed. Further, assumes that each bond has $1,000 par value, each had a 30-year maturity when it was issued, and the bonds currently have a 10 percent required nominal rate or return.

For the purposes of risk premium consistency, the arithmetic average was most applicable to the historic US government bonds of 4.58% for the longest period because of its accurate estimate.

Moderate risk. Purchasing a bond means giving a loan to a company. “T-Bonds” are bonds issued by the U.S. Treasury and are safer than corporate bonds. (Loaning money to the government is safer than loaning money to a private business.)

The yield to maturity on a 15-year bond is a true estimate of the cost of 30-year bond

1. Briefly explain why many corporations prefer to issue callable long-term corporate bonds rather than noncallable long-term bonds.

D* = 3.59/1.053 = 3.41 years Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

The Yield to Maturity (YTM) of a bond is:   Interest rate that makes the present value of the bond’s

What would happen to the price, current yield, and total return of each bond over time assuming constant future interest rates?

Answer: The Coupon Rate is a generally fixed and is known as the stated rate of a bond that determines the periodic interest payments. As stated in the textbook, the annual coupon dividen by the face value is called the coupon rate of the bond. The YTM rate of return anticipated on the bond if it is held until the maturity Date. YTM is considered a long-term bond yield expressed as an annual rate.

If the company benefits from the provision of the bond, then the coupon rate will be higher. If the bondholder’s benefit, then the bond will have lower coupon rate.

That rate was determined by the rating of the bond. Bond ratings are derived from a

It provides an evaluation of the bond issuer’s financial strength and ability to pay back the bond’s principle and interest. The bond rating also provides investors with some sense of security when investing in a particular firm. A higher bond rating implies a lower likelihood for the firm to default. Investors would feel more secured investing in such a bond, thus demanding a relatively lower rate of return. As such, high rated bonds enable the issuer to enjoy a lower cost of borrowing. A lower bond rating, on the other hand, serves as a negative signal to investors on the firm’s ability to repay debt obligations.

A bond is a "security" which gives the holder a financial claim on the issuer. This claim protects the holder in circumstances in which the issuer is unable to pay the amount due. It is made formal by the "trust indenture", a legal document, which specifies all of the bond's features and the legal rights and obligations of all the parties to the agreement (http://www.finpipe.com/bndchar.htm).

A bond is debt to whoever sells the bond to an inventor. If you buy an IBM bond, you are loaning money ($1000) to IBM instead of a bank loaning money to them. Just like a bank, you are going to charge IBM interest on your money, as well as a return of principle when the loan is due (ten years later). The company does not go to the bank to borrow the money, because the bank will rate the company as a high risk company. Hence, banks are really tight with their money. High yields bond investment relies on an credit analysis in that it concentrates on issuer fundamentals, and a "bottom-up" process. It focuses more on "downside risk default and the unique characteristics of the issuer. In a portfolio of high yield bonds,

4. Consider a bond issued at par. The annual coupon is 8 percent and frequency of coupon is semiannual. How would the YTM of this bond be reported in most of the European markets?