A. Example . Rating Category Default Rates:

Rating 1 year Default Rates Cumulative 10 year Default Rates

AAA 0 36/10,000

AA 1/10,000 36/10,000

A 2/10,000 87/10,000

BBB 18/10,000 2.87%

BB 1.18% 11.40%

B 5.41% 24.60%

CCC 19.90% 41.20%

Discuss the difference between one year default rates and cumulative default rates.

B. Consider the following investment grade company:(Please answer second Part)

EBITDA500

Debt1,000

Rent50

1.Calculate EBITDA/interest, fixed charge coverage and Debt/EBITDA

Debt / EBITDA = 1000/500 = 2x

EBITDA /Interest expense= $ 500 / (1000*6%) = 500/60 = 8.3x

Fixed charge coverage = (EBITDA + Rents) / (Interest Expense + Rents) = (500 + 50)/ (60+50) = 5x

2.Discuss why fixed charge coverage is a better ratio than EBITDA/interest when calculating a firm's ability to service its obligations?