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Unformatted text preview: o Bond ratings: Problem is that rating agencies get paid by firms issuing the bonds Probability that a firm will default on bond Lower the rating, higher the risk of default, higher the rate of return demanded by bondholders (higher yield) o Valuing corporate debt: Present value of contractually promised cash flows YTM: 0 = -Price + int./ (1+r)^1 + + principal/ (1+r)^N Use Excel GoalSeek or RATE function for simple cases o Only works w/ consistent interest payments Discount bond: YTM is larger than coupon rate Market yields: Quoted in terms of credit spreads or spreads to Treasury bonds...
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