Typical Individuals Have Difficulty Judging the Default Risk of Any

question 22

Multiple Choice

Typical individuals have difficulty judging the default risk of any one company,let alone the thousands of firms that sell bonds in a developed economy.To address this problem,

• A) the price of bonds increases as more information is made available to investors.
• B) borrowing entities rate their own bonds.
• C) individuals should never invest in bonds.
• D) the government assigns ratings of borrowing entities.
• E) private rating agencies evaluate and then grade the default risk of borrowing entities.

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Definitions:

Present Value

Present Value is a financial concept that calculates the current worth of a future sum of money or stream of cash flows given a specified rate of return.

Contract Interest Rate

The interest rate specified in a loan or bond agreement, representing the cost of borrowing or the rate of return promised to lenders.

Troubled Debt Restructuring

A process where the terms of a debt are modified due to the debtor's financial difficulties to provide relief.

Stated Interest Rate

The interest rate that is agreed upon in the loan document, which does not account for compounding.