and Their Valuation
All bonds have
some common characteristics, but they do not always have the same contractual
features. Differences in contractual provisions, and in the underlying strength
of the companies backing the bonds, lead to major differences in bonds' risks,
prices, and expected returns. The risk investors are exposed to in buying a
bond is in part gauged by bond rating agencies. The three major bond rating
agencies are Moody's, Standard & Poor's, and Fitch's. Bonds are assigned quality
ratings that reflect their probability of default. Changes in a firm's bond
rating influence its ability to borrow long-term capital and the cost of that
capital. Rating agencies review outstanding bonds on a periodic basis, occasionally
upgrading or downgrading a bond because of changes in an issuer's circumstances.
and answer the following questions.
- From Moody's
main page, select "Corporate Finance > Syndicated Loan Ratings". This takes
you to a page of ratings news page chronicling Moody's ratings actiions. Click
on "Ratings Definitions", should be on the right side of the page. From within
the Ratings Definitions section, select "Long Term Ratings: Bonds and Preferred
Stock". What do the following ratings mean: Aaa, A, Baa, B, and C?
when you see a firm's Moody bond rating, there will be a number after the
ratings classification. What do these modifiers signify, and for which issues
might you expect to see a numeral modifier?
- Briefly describe
the different kinds of Issuer Ratings and describe the characteristics of
a Aaa rated issuer.
- Access Moody's
report "The Bond Rating Process In A Changing Environment". Why are investors
concerned with issues of credit quality?
- What are some
of the changes Moody's is considering in order to create a better alignment
between credit changes and ratings changes, and what effect would these changes
probably have on the volatility of Moody's ratings?
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