Question

How bond ratings agency ratings can impact the prices and yields of bonds during financial crises.

Answer 1

Bond rating is a way to measure the quality and creditworthiness of a bond. The bonds are rated using letters which indicates their credit quality. There are many agecies like Moffy's Investor service and Fitch Rating Inc. to name a few. Bond ratings are essential to create and build investor trust on the quality and stability of the bond. These ratings influence bond prices, interest rates and demand for bonds. Particularly during a financial crisi when investors are uncertain about the future of the bonds they want to invest in, here in agency rating play a vital role in gaining investor trust towards a bond. Generally a higher rated bond (known as Investment Grade Bonds) is the most sort after during financial crisis as they are viewed to be stable and safer investments and give higher yields. Next come the Non-investment graded bonds. these carry standard and poor ratings. such bonds carry higher risk, but still attract some investors due to their high yield factor. finally come the completly junk bonds are highly risky and are saddled by liquidity issue and may even feasibly default leaving investors with nothing.

Thus bonds rating play a vital role particularly during financial crisis, however during the 2008 crisis it was bribed backed ratings of agencies on mortagebacked securities which led to the crisis. so ageny ratings and analysis is important during financial crisis. however the best way to judge a bond is self research and intutive analysis of the market. 2008 crisis has poved that bond ratings can be deceptive.