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Explain why the required rate of return is higher for-bb-aa

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Question: Your broker is offering you two bonds issued by two U.S. companies. One bond has an AA credit rating and the other has a BB rating from Standard and Poor's. Both bonds have a par value of $ 1.000, a coupon rate of 10%, and a maturity of 10 years. The required rate of return by investors is 8% for AA-rated bonds and 12% for BB-rated bonds. Please answer the following questions. 1) Explain the purpose of credit ratings. 2) Explain why the required rate of return is higher for BB-rated bonds than for AA-rated bonds.

Reference no: EM131441678

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