CAS Exam 9 Spring 2015, Question 12
Study guide: Exam 9
Given the following information about two companies in different industries:
- ABC is in an industry that is expected to become more competitive.
- XYZ has a business plan that relies on the successful development of a new product.
- One company has Ba-rated debt, and the other B-rated debt.
- B-rated and Ba-rated debt have expected cumulative default rates described in the table below:
| Term (years) | 5 | 10 | 15 |
|---|---|---|---|
| Ba | 10% | 20% | 30% |
| B | 30% | 50% | 58% |
Part a (1 point)
Evaluate which bond rating more accurately describes the expected change in probability of default as a function of time for Company XYZ.
Part b (1 point)
Assuming both companies are still in business in 10 years, use the table of default rates to determine which company is expected to have better credit-worthiness.
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