Question

A company's bond ratings might in concept be similar to your own personal credit ratings. Use an example of how someone's personal credit rating might affect their financial life -- and then translate that to how a bond rating might affect a company's financial choices. (at least 200 words and no copy or plagiarism)

Answer 1

Answer:

Credit Rating- It evaluates the credit risk and repayment capacity of an individual or a company. It estimates the ability of a person to fulfill his/her financial commitments.

Examples: AAA, AA+, AA-, BBB+, BB+

Credit rating agencies- The companies that provide credit ratings after analyzing the risk of the company.

Examples: Moody's Standard & Poor's

A bond's credit rating may be similar to your own personal credit ratings, that is true.

Examples-

Bond- A bond credit rating influences the buyers, coupon rate and yield of the bonds. If a bond has higher credit rating, it may offer lower coupons and yield while a lower credit rating bond has to offer higher yield to make it salable.

Personal life- A person who gets better CIBIL or credit score, he easily gets home loan, auto loan, personal loan etc. Higher CIBIL score shows the ability of that person to repay the loan while a person, having lower CIBIL score may find himself difficult in getting the loan. He may not get loan or he may get the less amount of loan, his consumption may come down.

Bond rating affects a company's financial choices- A company with AAA and AA+ bond rating can issue bonds with lower coupons or yield because investors will buy the bonds with higher rating regardless of lower yield. Company issues junk bonds that are risky and provide higher yield. Company that issues bonds with lower credit rating, have to provide higher returns to attract the investors.