Question

In: Accounting

What role do Moody’s, Standard & Poor’s, or Fitch’s bond ratings play in the pricing of...

What role do Moody’s, Standard & Poor’s, or Fitch’s bond ratings play in the pricing of a bond?

Solutions

Expert Solution

Moody's, Standard and Poor's and Fitch Ratings are some of the most internationally well-known bond-rating agencies. These organizations operate to provide investors with quantitative and qualitative descriptions of the available fixed income securities. Generally, a "AAA" high-grade rated bond offers more security and a lower profit potential (lower yield) than a "B-" rated speculative bond.

Ratings agencies research the financial health of each bond issuer (including issuers of municipal bonds) and assign ratings to the bonds being offered. Each agency has a similar hierarchy to help investors assess that bond's credit quality compared to other bonds. Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade." Bonds with lower ratings are considered "speculative" and often referred to as "high-yield" or "junk" bonds.

Moody's, Standard & Poor's, and Fitch append their ratings with an indicator to show a bond's ranking within a category. Moody's uses a numerical indicator. For example, A1 is better than A2 (but still not as good as Aa). Standard & Poor's and Fitch use a plus or minus indicator. For example, A+ is better than A, and A is better than A-.

Remember that ratings aren't perfect and can't tell you whether or not your investment will go up or down in value. Before using ratings as one factor in your investment selection process, learn about the methodologies and criteria each ratings agency employs. You might find some methods more useful than others.


Related Solutions

(1) What are credit ratings? (2) Credit rating agencies such as Moody’s and Standard & Poor’s...
(1) What are credit ratings? (2) Credit rating agencies such as Moody’s and Standard & Poor’s use several factors to determine a company’s credit rating. Please list any three factors that can play a role in determining a company’s credit rating. (3) Compared to companies with a poor credit rating such as D, companies with good credit ratings such as AA or AAA have to pay higher or lower interest to borrow money? Explain your answer.
There is a debate on conflicts of interest that exist between certain bond ratings agencies, such as Moody’s and Standard & Poor’s, and the corporation’s bonds that they rate.
There is a debate on conflicts of interest that exist between certain bond ratings agencies, such as Moody’s and Standard & Poor’s, and the corporation’s bonds that they rate. There is also a debate on conflicts of interest that exist between financial firms, such as Goldman Sachs and J.P. Morgan, and the corporation’s equity that rate. Discuss strategies that would reduce these conflicts of interest.
Compare 4 different rating agencies (A.M.Best; Fitch Ratings; Moody’s investor’s Service; Standard & Poor’s (S&P))
Life InsuranceCompare 4 different rating agencies (A.M.Best; Fitch Ratings; Moody’s investor’s Service; Standard & Poor’s (S&P)), please point out the pros and cons of each rating agencies.
6. Moody’s Investors Service and Standard and Poor’s adjusted the way they graded securities after Goldman...
6. Moody’s Investors Service and Standard and Poor’s adjusted the way they graded securities after Goldman Sachs Group Inc., UBS AG and at least six more banks pressured them, according to a U.S. Senate report. “The world’s two largest bond-ranking companies made exceptions to rules when bankers asked for better safety ratings on complex mortgage-backed securities, the Senate Permanent Subcommittee on Investigations said yesterday. When Moody’s and S&P changed their assessments of hundreds of those bonds in July 2007, it...
Explain what Bond Ratings are. What do Bond Ratings indicate and  how do they impact risk...
Explain what Bond Ratings are. What do Bond Ratings indicate and  how do they impact risk and return of a bond?
What role do standard costs play in controlling the operations of a business? How are standard...
What role do standard costs play in controlling the operations of a business? How are standard costs developed for direct materials, direct labor, and manufacturing overhead? Are there ever costs that we cannot develop standards for related to manufacturing the goods?
Ratings Agencies play an important role in credit markets. Carefully establish what this role is and...
Ratings Agencies play an important role in credit markets. Carefully establish what this role is and why it is important. Appraise and explain the factors that might undermine the usefulness of credit ratings.
9. What are bond covenants (give examples) and what role do restrictive covenants play in bond...
9. What are bond covenants (give examples) and what role do restrictive covenants play in bond markets?
What role do PROFITS play in a perfectly competitive market? What role do LOSSES play in...
What role do PROFITS play in a perfectly competitive market? What role do LOSSES play in a perfectly competitive market?
8.         Bond Ratings [LO3] Companies pay rating agencies such as Moody’s and S&P to rate their bonds,...
8.         Bond Ratings [LO3] Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated; doing so is strictly voluntary. Why do you think they do it?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT