1 . How should Jill go about explaining the relationship between coupon rates and relationship prices? So why do the discount rates for the various bonds vary so much?
Jill may explain the partnership between voucher rates and bond rates by calculating the prices of bonds, which have similar features except for all their coupon costs, under different assumptions about the yield to maturity. [For example, the 0%, AAA-rated, 20-year ABC Strength bond plus the 5%, AAA-rated. 20-year FONEM Energy connection. ]
BondCoupon RateMaturityFace ValueRatingYieldPrice% Change FONEM Energy5%20$1, 500 AAA2%$1, 490. 54 forty-nine. 05%
HURUF Energy5%20$1, 500 AAA5%$1, 000. 00 zero. 00%
FONEM Energy5%20$1, 500 AAA8%$705. 46 -29. 45%
ABC Energy0%20$1, 000 AAA2%$672. 97 80. 56%
ABC Energy0%20$1, 1000 AAA5%$376. fifth there’s 89 0. 00%
ABC Energy0%20$1, 000 AAA8%$214. 55 -43. 07%
The table demonstrates that the five per cent coupon connect has a low range fluctuation in price compared to the zero-coupon relationship for equal changes in produces.
2 . How are the ratings of these bonds established? What happens if the bond scores get tweaked downwards?
The ratings are determined by specialist rating agencies such as Normal & Poor's and Moody's. Each of these ranking agencies contains a committee that evaluates the chance level of a company's connect issue and accordingly assigns a ranking ranging from AAA or Aaa (best rating) down to D (default). The ratings happen to be periodically re-evaluated whenever there may be any significant development in a company's capital structure or earnings performance. When ratings get modified downward, the bond becomes less desirable and therefore the required rate of return goes up, minimizing its price.