CP

Default Risk 175

FIGURE 4-4 Yields on Selected Long-Term Bonds, 1960–2001

Source:Federal Reserve Board, Historical Chart Book,1983, and Federal Reserve Bulletin: http://www.federalreserve.gov/releases.

16

14

12

10

8

6

4

2

16

14

12

10

8

6

4

2

1960 1965 1970 1975 1980 1985 1990

U.S. Government

Wide Spread

Corporate BBB

Corporate AAA

Narrow Spread

Percent

1995 2000

Changes in Ratings Changes in a firm’s bond rating affect both its ability to borrow

long-term capital and the cost of that capital. Rating agencies review outstanding

bonds on a periodic basis, occasionally upgrading or downgrading a bond as a result of

its issuer’s changed circumstances. For example, in October 2001, Standard & Poor’s

reported that it had raised the rating on King Pharmaceuticals Inc. to BBfrom BB

due to the “continued success of King Pharmaceuticals’ lead product, the cardiovascu-

lar drug Altace, as well as the company’s increasing sales diversity, growing financial

Bonds and Their Valuation 171