Notes On Bond And Bond Rating

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Introduction to bond and bond ratings A bond is a form of debt in which you loan your money to a company, city, or government and in return they agree to return the money to you after an agreed upon time, with payments of interest to you while they hold your money (Wall Street Journal, 2015). There are many different kinds of bonds, and they are sold to fund various different projects. Bonds are seen as a safe investment and also offer investors a steady stream of income from the interest payments. Although this may be the case for some bonds, it isn’t the case for all bonds that are issued. This is where the bond ratings system comes into play. Bond rating is a system used to provide investors with an idea of the risk they are taking…show more content…
The ratings for bonds are provided by three major rating agencies: Standard & Poor’s Corporation, Moody’s Investors Services and Fitch’s Investor Services (Brigham & Houston). Each use quantitative and qualitative information to ensure that an accurate rating has been provided to investors.
Factors that determine bond ratings When a rating agency examines a firm’s bonds, they must look at various different factors that will help to paint a much larger picture of the financial health of the firm. An agency will use quantitative factors to look at the history of the firm and while using qualitative factors to look to the future stability of a firm and its ability to follow through on its contractual obligations to bond holders (Brigham & Houston, 2013) The quantitative factors an analyst would use include ratios that evaluate the company’s ability to payout what’s owed to bondholders. These ratios include the total debt to total capital ratio, which verifies the amount of capital provided by debt holders, and the times-interest-earned ratio, which evaluates a company’s ability to pay out interest owed to bondholders (Brigham & Houston, 2013). This information can then be used to help create forecasted financial statements, which shed light on the ability to not only meet current liabilities, but to continue to meet them for years to come. The qualitative factors are based on the quality of the firm, the product, and the leadership. This can include
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