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. Bond Rating and Risk
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Please note that some links given on the original posting were not working properly. I have provided alternate links. ( when you go to Moody's web site-please choose about Moody's on its Menu).
The corporations that issue bonds to the investing public commonly get the bonds rated by one or more of the independent rating companies. In order for corporations to sell debt securities, the investing public must be able to obtain an independent assessment of the risks associated with corporate bonds. Investors depend on the rating agencies to assess risk and returns on bonds in various risk categories and then assign ratings
There are three major rating agencies for debt securities of domestic firms: Standard and Poor’s, Moody’s and Fitch. Each of the rating services has web pages describing rating process
Answer the following questions
1. Describe the ratings process.
2. What are investment grade bonds?
3. Identify the key ratios that might go into assignment of ratings of bonds
Explanation / Answer
1. Standard and Poor's is a division that publishes financial research and analysis on stocks and bonds. It is known for its stock market indices such as the U.S.-based S&P 500, the Canadian S&P/TSX, and the Australian S&P/ASX 200.
The purpose of Moody's ratings is to provide investors with a simple system of gradation by which future relative creditworthiness of securities may be measured.
Fitch ratings is an international credit rating agency based out of New York City and London. The company's ratings are used as a guide to investors as to which investments are most likely going to yield a return. It is based on factors such as how small an economic shift would be necessary to affect the standing of the bond, and how much, and what kind of debt is held by the company.
2. An investment grade is a rating that indicates that a corporate bond has a relatively low risk of default.
Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating.
'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade.
Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".
3. Interest Coverage Ratio and Debt Ratio
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