Question

Do some research on bond rating companies such as Moody's and Standard and Poor. Explain the reasons for bond ratings and how prices of bonds may be affected. Are bonds good investments?

Answer 1

In present day world, almost every bond issued is rated by atleast one bond rating company. Bond rating provides important information to the investor about bond and also about the issuer so that they can decide whether to invest in the bond or not.

Moody's and Standard and Poor are the two major company that are involved in the work of rating bonds.

Individual investors usually lack the expertise and skill of analysing the bond, so they rely upon the bond rating provided by these companies.

Ratings of the bond directly affect its market price. If a bond has negative rating, then investors are reluctant to pay high prices for the bond. Accordingly, the bond price comes down. On the other hand, if a bond is positively rated, then the investor considers the bond to be a safe investment and is ready to pay high price for it.

Bonds are good investments because they are less risky and less volatile as compared to stock. The investor is assured to get his interest on time and also his principal back on maturity no matter if the company is in losses or profits.

But before investing in any bond, the quality of the bond must be analysed by the investor in terms of bond ratings, bond yield, maturity period etc.

So, overall it can be said that bonds are a good investment.