Analysts assessed the effects of bond ratings on bond yields. They reported a regression with r2 = 61.56%, which, they said, confirmed the economic intuition that predicted higher yields for bonds with lower ratings (by economic theory, an investor would require a higher expected yield for investing in a riskier bond). The conclusion was that, on average, each notch down in rating added an approximate 14.6 basis points to the bond’s yield. How accurate is this prediction?
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