Over time, bonds are liable to move from one rating category to another. This is sometimes...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Over time, bonds are liable to move from one rating category to another. This is sometimes referred to as credit ratings migration. Rating agencies produce from historical data a rating transition matrix. This matrix shows the probabiltiy of a bond moving from one rating to another during a certain period of time. Usually the period of time is one year. Below is a table giving a rating transition matrix produced from historical data by Standard and Poor's (S&P) In reality, this transition matrix is updated every year. However if assuming no significant change in the transition matrix in the future, then one can use the transition matrix to predict what will happen over several years in the future. In particular, one can regard the transition matrix as a specification of a Markov chain model. Answer the following questions (a) Classify the states of ratings (transient or recurrent). What ratings are absorbing states? (b) Determine the classes of communicating states. (e) What is the probability that a currently "AAA" rated bond becomes default after 4 years? (d) Now consider what will happen in the long run, assuming that the transition matrix above operates every year. In the long run, what fraction of bonds are in "AAA"? and what fraction of bonds are in default? Over time, bonds are liable to move from one rating category to another. This is sometimes referred to as credit ratings migration. Rating agencies produce from historical data a rating transition matrix. This matrix shows the probabiltiy of a bond moving from one rating to another during a certain period of time. Usually the period of time is one year. Below is a table giving a rating transition matrix produced from historical data by Standard and Poor's (S&P) In reality, this transition matrix is updated every year. However if assuming no significant change in the transition matrix in the future, then one can use the transition matrix to predict what will happen over several years in the future. In particular, one can regard the transition matrix as a specification of a Markov chain model. Answer the following questions (a) Classify the states of ratings (transient or recurrent). What ratings are absorbing states? (b) Determine the classes of communicating states. (e) What is the probability that a currently "AAA" rated bond becomes default after 4 years? (d) Now consider what will happen in the long run, assuming that the transition matrix above operates every year. In the long run, what fraction of bonds are in "AAA"? and what fraction of bonds are in default?
Expert Answer:
Answer rating: 100% (QA)
Answer a The states of ratings are transient The ratings that are absorbing states are AAA and Defau... View the full answer
Related Book For
Financial Statement Analysis
ISBN: 978-0078110962
11th edition
Authors: K. R. Subramanyam, John Wild
Posted Date:
Students also viewed these accounting questions
-
The banquet event order (BEO) is sometimes referred to as a: a) meeting resume b) convention resume c) function resume d) all of the above
-
Predict what will happen to the risk premiums on corporate bonds if brokerage commissions are lowered in the corporate bond market.
-
Predict what will happen to the money supply if there is a sharp rise in the currency ratio.
-
The balance sheet for the Heir Jordan Corporation follows. Based on this information and the income statement in the previous problem, supply the missing information using the percentage of sales...
-
A beam of protons is moving toward a target in a particle accelerator. This beam constitutes a current whose value is 0.50 A. (a) How many protons strike the target in 15 s? (b) Each proton has a...
-
1. In your opinion, should Food Network try to attain prestige objectives through pricing? Why or why not? 2. How would you classify the market structure for Food Networks offerings (both content and...
-
Lynch Brothers manufactures conveyor belts. Early in January 2011, Lynch Brothers constructed its own building at a materials, labor, and overhead cost of $900,000. Lynch Brothers also paid for...
-
George Robbins considers himself an aggressive investor. Hes thinking about investing in some foreign securities and is looking at stocks in (1) Bayer AG, the big German chemical and health-care...
-
A boxplot for a set of 76 scores is given below. T T T T 5 6 7 8 9 10 11 12 13 DATA How many scores are represented in the blue section of the boxplot? Answer: 19 Preview My Answers Submit Answers
-
Mary Church, an internal accountant for Wardak Construction Consulting, is investigating a loss of $100,000 via four checks for $25,000 each. It appears that the checks had been stolen from the...
-
Presented here is the income statement for Fairchild Company for March: $ 79,500 40,500 $ 39,000 Operating expenses 31,000 Operating income $ 8,000 Based on an analysis of cost behavior patterns, it...
-
Explain the difference between \(\hat{\beta}_{1}\) and \(\beta_{1}\); between the residual \(\hat{u}_{i}\) and the regression error \(u_{i}\); and between the OLS predicted value \(\hat{Y}_{i}\) and...
-
Suppose the economys labor market is competitive and that labor demand can be written as w = 50 0.3E while labor supply can be written as w = 8 + 0.2E where E is the total amount of employment in...
-
A random sample of 200 20-year-old men is selected from a population and these men's height and weight are recorded. A regression of weight on height yields \[ \widehat{\text { Weight }}=-99.41+3.94...
-
. A monopsonists demand for labor can be written as VMPE = 40 0.005ED. Labor is supplied to the firm according to w = 5 + 0.01ES. Thus, the firms marginal cost of hiring workers when it hires off of...
-
You are asked to study the causal effect of hours spent on employee training (measured in hours per worker per week) in a manufacturing plant on the productivity of its workers (output per worker per...
-
Age (years) and volume (cubic feet) information for a stand of trees growing in the Superior National Forest is given in the table below. Age Volume 10 1000.00 11 1070.00 12 1134.20 13 1190.91 14...
-
Wal-Mart is the second largest retailer in the world. The data file on the disk holds monthly data on Wal-Marts revenue, along with several possibly related economic variables. a) Using computer...
-
What factors do rating agencies emphasize in rating an industrial bond? Describe these factors.
-
How is return on invested capital used as an internal management tool?
-
The financial data below should be used to answer the following two questions. WRESTLING FEDERATION OF AMERICA, INC. Capital Structure and Earnings for Year 7 Number of common shares outstanding on...
-
Describe the financial accounting journal entry to record the sale/disposal of a fixed asset.
-
Ski resorts are interested in the mean age that children take their first ski and snowboard lessons. They need this information to plan their ski classes optimally. identify: a. the population, b....
-
Insurance companies are interested in the mean health costs each year of their clients, so that they can determine the costs of health insurance. identify: a. the population, b. the sample, c. the...
Study smarter with the SolutionInn App