The price of a bond issue is determined by the market or effective rate of interest. A bond issue with a 10% stated interest rate will sell for less than face value if the market or effective rate of interest is 12%. The creditworthiness of the issuing entity is one of the factors that influence the market rate for a specific bond issue. Investors rely heavily on bond ratings provided by Standard & Poor's Corporation and by Moody's Investors Service, Inc.
Required:
Complete the table below by entering the appropriate rating for each level of risk under the S&P and Moody's rating systems.
Definitions:
Present Consumption
The use of goods and services for immediate satisfaction or needs, as opposed to saving or investing for future use.
Behavioral Economists
Economists who study the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and how those decisions vary from those implied by classical theory.
System 2
A concept from cognitive psychology that refers to the deliberate, analytical, and slow way of thinking, as opposed to quick, instinctual decisions.
Endowment Effect
The tendency for people to value something more highly simply because they own it.
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