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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As well as if the company is good for issuing a loan, or investing in some other fashion such as bonds. For better breakdown these ratios have been separated in three categories: Measure of Profitability, Measures of Liquidity, and Measures of Solvency.
Moderate risk. Purchasing a bond means giving a loan to a company. “T-Bonds” are bonds issued by the U.S. Treasury and are safer than corporate bonds. (Loaning money to the government is safer than loaning money to a private business.)
* From the e-Activity, imagine that you are advising an investor who is considering purchasing bonds from the selected company. Analyze the types of bonds the chosen company issues and make a recommendation to the investor as to which type of bond would provide the most value. Justify your response.
Creditors normally focus on the liquidity or solvency of the borrower in terms of current ratio and quick ratio, which indicate whether the company has enough working capital to cover the short-term debts. Myer will enter into a syndicated facility agreement to refinance the existing borrowings of the Myer Group. Besides, creditors are interested in the business risks the company might undertake, which indicate the possibility that the company might be unable to pay back the long-term liability in the future. From this point, the expectation on high return on investment and high profitability in the long run make the creditor’s interest aligned with shareholders’ value.
The efficiency of the County’s financial management have allowed it to maintain the AAA bond rating, which allows borrowing at the lowest possible interest rate. This saves the County millions in future borrowing costs.
Bond Ratings in Capstone are evaluated by comparing current debt interest rates with the prime number. All bonds are issued on a 10 year note; bonds that are issued to companies will pay a 5% brokerage fee. How do you read a bond the first three digits of the serial number on a bond indicates the interest rate example 14.7S2018 the interest rate would be 14.7% and is due December 31, 2018.
Two doctors, W. Marshall and J. M. Tanner staged puberty into five Sexual Maturity Rating (SMR) stages, commonly referred as Tanner Stages one through five. The staging helps determine whether development is normal for a given age and it is based on pubic hair growth, on genital development, and female breast development. The age at which puberty begins can vary widely between cultures. Variation in timing of puberty around the world is affected by genetic factors (family, ethnicity, and gender), intrauterine conditions, nutritional state, body mass, general health, light-darkness cycle and climatic conditions, and exposure to endocrine-disrupting chemicals (EDCs) (Parent et al., 2011).
It provides an evaluation of the bond issuer’s financial strength and ability to pay back the bond’s principle and interest. The bond rating also provides investors with some sense of security when investing in a particular firm. A higher bond rating implies a lower likelihood for the firm to default. Investors would feel more secured investing in such a bond, thus demanding a relatively lower rate of return. As such, high rated bonds enable the issuer to enjoy a lower cost of borrowing. A lower bond rating, on the other hand, serves as a negative signal to investors on the firm’s ability to repay debt obligations.
A bond is a "security" which gives the holder a financial claim on the issuer. This claim protects the holder in circumstances in which the issuer is unable to pay the amount due. It is made formal by the "trust indenture", a legal document, which specifies all of the bond's features and the legal rights and obligations of all the parties to the agreement (http://www.finpipe.com/bndchar.htm).
Long term creditors and shareholders are interested in this part of ratios and very carefully to deal with it. It evaluates how the company is using or managing its debt. Debt asset ratio and times interest earned and times interest earned will be calculated in
A bond is debt to whoever sells the bond to an inventor. If you buy an IBM bond, you are loaning money ($1000) to IBM instead of a bank loaning money to them. Just like a bank, you are going to charge IBM interest on your money, as well as a return of principle when the loan is due (ten years later). The company does not go to the bank to borrow the money, because the bank will rate the company as a high risk company. Hence, banks are really tight with their money. High yields bond investment relies on an credit analysis in that it concentrates on issuer fundamentals, and a "bottom-up" process. It focuses more on "downside risk default and the unique characteristics of the issuer. In a portfolio of high yield bonds,
Though stocks have statistically delivered higher returns in the long term compared to bonds, bond prices are less volatile. The dividends paid out on stocks are uncertain and depend on the distributable profits of the company, the company’s investment plans and cash needs for the same, and other such factors. On the other hand, bonds generally make a pre-specified interest payout to all bondholders periodically, thereby ensuring an assured, known cash-inflow in the hands of a bond-holder. Further, on maturity of the bond, a pre-determined principal amount is paid out by the issuer to the bondholder, to purchase back the bond. Hence, a bondholder who holds the bond to maturity, knows exactly how much he /she will receive both by way of interest as well as principal on maturity. This is completely untrue for stocks, where neither the dividend flow nor the capital appreciation is predictable with certainty.