Credit Risk and Yield Rank the following bonds in order from lowest credit risk

Question

Credit Risk and Yield Rank the following bonds in order from lowest credit risk to highest risk, all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent. IB bond, B&O bond, TC bond, JM bond JM bond, TC bond, B&O bond, IB bond JM bond, IB bond, B&O bond, TC bond TC bond, B&O bond, IB bond, JM bond IB bond, B&O bond, TC bond, JM bond JM bond, TC bond, B&O bond, IB bond JM bond, IB bond, B&O bond, TC bond TC bond, B&O bond, IB bond, JM bond IB bond, B&O bond, TC bond, JM bond JM bond, TC bond, B&O bond, IB bond JM bond, IB bond, B&O bond, TC bond TC bond, B&O bond, IB bond, JM bond

Explanation / Answer

The rule here is the higher yield bonds have higher credit risk as the yield also includes the default risk premium that is over and above the risk free rate

So accordingly Just arrange the bonds from lowest to highest yeilds

So order from lowest credit risk to highest credit risk will be

IB bond, B&O bond, TC bond , JM bond which is option A

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