Corporations have limited liability. If companies are unable to pay their debts ,they to pay I can file for bankruptcy. Lenders are aware that they may receive less than they are owed, and that the expected yield on a corporate bond is less than the promised yield.
Because of the possibility of default, the promised yield [...]
It is March 2007 and you own Anheuser Busch (BUD) 5.6% bonds maturing in 2017. The bonds are rated A by Standard & Poor’s and are currently priced at 103.84% to offer a promised yield to maturity of 5.1%. If you plan to hold the bonds for the next 12 months, how much risk are [...]
However, banks and consulting firms are now finding that they can use these
ideas to measure the risk of actual loans. Consider the case of WorldCom. In July
2002 WorldCom became America’s largest bankruptcy with over $100 billion of
book assets. The extent of the company’s problems had been partly obscured by a
huge accounting fraud, but the company [...]