Question

1. Describe the primary features of long-term debt securities
2. What are the three major rating agencies and what criteria do they use when assigning ratings?

Answer 1

The primary feature of long term debt is :

• The duration of long term debt is greater than 12 months.
• The long term debt is usually secured by a collateral. In case, the borrower defaults on the loan, the proceeds are collected by selling off the collateral.
• The interest rate on the loan is lower in comparison to the unsecured  loan where there is no collateral attached as security as a result the interest rates are higher on these loans.

The three major rating agencies are Standard and Poor, Fitch and Moody. The criteria used when assigning the ratings is the financial soundness which is the ability to pay the principal and interest in these bonds and the future outlook of the companies issuing the bonds and the probability of default. These ratings indicate the credit quality of these bonds .The criteria followed to rate these companies are different, each agency has their own set of criteria to assign ratings to bonds. The ratings range from investment grade bonds to junk bonds.