est: Mid-Term Exam 2 Time Remaining: 01:24:06 Submit Tes is Question: 4 pts 17 o

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est: Mid-Term Exam 2 Time Remaining: 01:24:06 Submit Tes is Question: 4 pts 17 of 25 (22 complete) This Test: 100 pts possi Alcoa Bonds Face Cut to Junk as Ratings Firms Await Profit Gairn Source: Lead Story-Dateline: Lococo, Edmond and John Detrixhe, "Alcoa Bonds Face Cut to Junk as Ratings Firms Await Profit Gain," Bloomberg.com, http://www.bloomberg com/apps/news?pid:20 60 1 087&sid-aYctV;'YGwYaAk&posed;#, posted 4/23/2010. Summary: Key Points in the Article Alcoa Inc. is threatened with a downgrade from the three major bond rating firms if the company fails to post earnings worthy of an investment grade rating. If the aluminum giant's rating falls it will increase future borrowing costs and reduce the company's "access to capital." The company's high debt level and the recession reduced demand for aluminum raised concerns about Alcoa's ability to service its debt. The company remains on a watch list for further downgrades after being cut to the lowest investment grade rating in February 2009 Alcoa currently has nearly $10 billion in debt with $666 billion coming due in one year. A number of analysts are recommending dumping outstanding Alcoa bonds in spite of inaction by rating agencies. Rating agencies have been criticized for not being aggressive enough recently, particularly with large companies Multiple Choice Questions Click to select your answer invitation to Identify.pdf search

Explanation / Answer

1. Junk bonds has high-yield and high default risk. So, a bond that is considered highly speculative is known as a junk bonds.

So, the correct answer is an option (B).

2. If a bond rating agency adjust the rating of an outstanding bond lower it is called a downgrade.

So, the correct answer is an option (B).

3. Bond ratings are critical to company issuing debt since the rating determines the risk of the bond and impact the interest rate a company must pay.

So, the correct answer is an option (B).

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