Now suppose there is a rating agency in the above bond market. The rating agency evaluates...
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Now suppose there is a rating agency in the above bond market. The rating agency evaluates the company that issued the bond. The buyer can acquire information at cost of $10. Suppose the rating agency announces an AAA rating, i.e. there is a 4% probability that the payoff of the bond is $20. a) Is there trade in equilibrium? If so what is the price the seller is offering? [8 Points] Suppose the rating agency announces a BB rating, i.e. there is a 90% probability that the payoff of the bond is $20. b) Is there trade in equilibrium? If so what is the price the seller is offering? [4 Points] c) How does the rating agency create liquidity in the bond market? Please provide an intuitive explanation. [4 Points] Now suppose there is a rating agency in the above bond market. The rating agency evaluates the company that issued the bond. The buyer can acquire information at cost of $10. Suppose the rating agency announces an AAA rating, i.e. there is a 4% probability that the payoff of the bond is $20. a) Is there trade in equilibrium? If so what is the price the seller is offering? [8 Points] Suppose the rating agency announces a BB rating, i.e. there is a 90% probability that the payoff of the bond is $20. b) Is there trade in equilibrium? If so what is the price the seller is offering? [4 Points] c) How does the rating agency create liquidity in the bond market? Please provide an intuitive explanation. [4 Points] Now suppose there is a rating agency in the above bond market. The rating agency evaluates the company that issued the bond. The buyer can acquire information at cost of $10. Suppose the rating agency announces an AAA rating, i.e. there is a 4% probability that the payoff of the bond is $20. a) Is there trade in equilibrium? If so what is the price the seller is offering? [8 Points] Suppose the rating agency announces a BB rating, i.e. there is a 90% probability that the payoff of the bond is $20. b) Is there trade in equilibrium? If so what is the price the seller is offering? [4 Points] c) How does the rating agency create liquidity in the bond market? Please provide an intuitive explanation. [4 Points]
Expert Answer:
Answer rating: 100% (QA)
answer a In equilibrium there will be trade if the buyer is willing to pay a price equal to or higher than the expected payoff of the bond Lets calcul... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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