Source: Compustat

Using this table as a guideline, a firm with an interest coverage ratio of 1.65 would have a rating of B for its bonds.

The relationship between bond ratings and interest rates in March 2004 was obtained by looking at the typical default spreads12 for bonds in different ratings classes. Table 8.4 summarizes the interest rates/rating relationship and reports the spread for these bonds over treasury bonds and the resulting interest rates, based upon the treasury bond rate of 4%.

Table 8.4: Bond Ratings And Market Interest Rates, March 2004


Typical default spread

Market interest rate on debt

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