Microsoft Word - Exercise 8 - Bond Ratings & Basis Points.docx

The following table shows the basis point spread over the Treasury security with the same maturity for the bond rating listed. Recall that 100 basis points = 1 percent.

Microsoft Word - Exercise 8 - Bond Ratings & Basis Points.docx

Source: http://giddy.org/db/corpspreads.htm

Microsoft Word - Exercise 8 - Bond Ratings & Basis Points.docx

1. Determine the difference between the AAA and CCC spreads. This indicates how much more of a yield is required on CCC-rated bonds versus AAA-rated bonds. Next, determine the difference between AAA and BBB spreads. Then determine the difference between the BBB and CCC spreads. Is the difference larger between the AAA and BBB or the BBB and CCC spreads? What does this tell you about the risk of the bonds in these rating categories?
2. Compare the AAA spread for a short-term maturity (such as two years) versus a long- term maturity (such as 10 years). Is the spread larger for the short-term or long-term maturity? Offer an explanation for this.
3. Next, compare the CCC spread for a short-term maturity (such as two years) versus a long-term maturity (such as 10 years). Is the spread larger for the short-term or long- term maturity? Offer an explanation for this.
4. Notice that the difference in spreads for a given rating level among maturities varies with the rating level that you assess. Offer an explanation for this.
5. Find an example of a company whose bond rating changed, preferably severely (either up or down). What was the firms reaction? Were there any consequences for the firm? Did the change stick, or did the firm revert back to its previous rating? Find out any additional pertinent/helpful details relating to this companys bond rating.

Microsoft Word - Exercise 8 - Bond Ratings & Basis Points.docx

1. Determine the difference between the AAA and CCC spreads. This indicates how much more of a yield is required on CCC-rated bonds versus AAA-rated bonds. Next, determine the difference between AAA and BBB spreads. Then determine the difference between the BBB and CCC spreads. Is the difference larger between the AAA and BBB or the BBB and CCC spreads? What does this tell you about the risk of the bonds in these rating categories?
2. Compare the AAA spread for a short-term maturity (such as two years) versus a long- term maturity (such as 10 years). Is the spread larger for the short-term or long-term maturity? Offer an explanation for this.
3. Next, compare the CCC spread for a short-term maturity (such as two years) versus a long-term maturity (such as 10 years). Is the spread larger for the short-term or long- term maturity? Offer an explanation for this.
4. Notice that the difference in spreads for a given rating level among maturities varies with the rating level that you assess. Offer an explanation for this.
5. Find an example of a company whose bond rating changed, preferably severely (either up or down). What was the firms reaction? Were there any consequences for the firm? Did the change stick, or did the firm revert back to its previous rating? Find out any additional pertinent/helpful details relating to this companys bond rating.