ECONOM 3229 Lecture Notes - Lecture 7: High-Yield Debt, Liquidity Premium, Yield Curve
6 Apr 2015
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Default (credit) risk is the risk that the bond issues will fail to make payments of interest and/or principal. Standard and poor"s moody"s fitch (government assigned rating company) They monitor bond issuers, both government and corporation and assign ratings. Non-investments speculative bonds: not trustworthy high possibility of weild default. Distinction between investment and non-investment grade bond is important. Some institutional investors, such as pension funds and commercial banks can"t invest in junk bonds. Commercial paper, which is a short term bond, is also rated. Mos commercial paper is unsecured and are used for short term financing. Lower bond rating decreases bond prices and increases its yield. 1) bond rating goes down, demand for that bond drops and price drops: bond rating does up, demand for that bond rises and price rises. Bond yield = compareable us treasure yield + risk spread (default risk premium) Two conclusions: when us treasury yields rises, corporate yield rises.
