Aswath Damodaran 321
Process of Ratings and Rate Estimation
! We use the median interest coverage ratios for large manufacturing firms to
develop “interest coverage ratio” ranges for each rating class.
! We then estimate a spread over the long term bond rate for each ratings class,
based upon yields at which these bonds trade in the market place.
The interest coverage ratios in the previous table are medians. We use the ratios
for large manufacturing firms to develop the table on the next page.
We also estimate a spread over the long term government bond rate at each
rating, using the average yield to maturity on long-term straight bonds within
each ratings class and comparing to the treasury bond rate. (Try
bondsonline.com for the latest default spreads)
