1. Whatisdefaultrisk? 2. A bond trades at above its face value of $1,000 and has a...

1. Whatisdefaultrisk?

2. A bond trades at above its face value of $1,000 and has a yield to maturity below the coupon rate. What would the yield to maturityonthisbondhavetobeforthebondtotradeatpar?

3. AssumenowthatBoeingisviewedasariskierfirm,andthatits rating drops. What will happen to the return required by bondholdersofBoeing?Whatistheimpactonthebondprice

Expert Solution

Part 1:
Default risk is the chance that the bond issuer will not make the required coupon payments or principal repayment to its bondholders
When a bond issuer is unable to pay the coupon or principal payment to the bondholders, then it is known as default risk. Normally business will lower credit rating carry default risk. The companies that are unable to generate enough capital from their business are unable to pay off the coupon payment and the principal repayment.

Part 2:
For a bond to sell at par, the yield to maturity should be equal to the coupon rate.

Part 3:
If the rating drops, the investors will demand for higher yield. So, credit rating and the yield to maturity are inversely related. So, if credit rating drops, the yield will increase.
If yield increases then the bond price will decrease, because the yield to maturity is used to discount the future cash flows of a bond to calculate its price.

jeff jeffy answered 8 months ago

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