Question

a) Why would a borrower choose to finance with a bond issue instead of a share issue? b) What are the general benefits and risks to an investor of investing in a bond compared to investing in a share? c) Like any other financial markets, bond issuers constantly develop and introduce innovative instruments with new features. List and explain three important innovations in the bond markets, in terms of what they are, when were they developed and are they likely to grow importance? (Hint: asset-backed bonds, index bonds, climate bonds, forest bonds etc.) d) What is credit rating? Is credit rating of the borrower important in bond markets? Discuss the differences between investment-grade bonds, speculative-grade bonds and junk bonds. e) Are there credit ratings in share markets also? If yes, are they important? Why? f) Identify the most important credit rating agencies. g) What do bond rating agencies base their quality ratings largely on? h) Credit rating agencies were criticised for the role they played during the Global Financial Crisis (GFC). Briefly identify why they were criticised.

(need 1000 words)

Answer 1

a)

The borrowers choose finance with bonds instead of share issues because the cost of bonds is less than the cost of equity.

b)

The general benefits of investing in bonds are as follows:

· Low cost of finance.

· Easy access to bond finance.

· Liability is fixed and determined.

· Provide tax shield

The risks of investing in bonds are as follows:

· Risk of liquidity

· Fixed cost without considering the profit.

· Negative impact on ratio

c)

Climate bonds were launched in December, 2010. This bond helps the investment community and the government to invest in a fund for climate changes.

An Index bonds derives their return from the performance of equity, and it is sustainable for long term. It also helps the investor who wants higher return from bonds.

Forest bonds start in October 2016

Forest bonds give a chance to the investor to serve their environment and improve it by making funding in the forest fund, in this time forest fund is the most important bond for preservation of the safety and beauty of forest.

d)

Credit rating is the evaluation of repayment of principal and interest thereon at the measurement date.

Yes, credit rating is important in the debt market, the investor analyzes the risk of any debt instrument from the credit rating.

Investment grade bonds provide higher return on the long term.

Speculative grade bonds provide higher return in a short period of time with high risk.

Junk bonds are not providing any return, either in short term or long term.