Question

Why are bond ratings so important to a firm?

Why are bond ratings important to external users?

Explain the importance of bond ratings in assessing risk.

Did the man's actions justify him losing his job? Why or why not?

Answer 1

Bond rating are important for a firm because the higher the bond rating the higher the chances of the firm to raise capita from the market by issuing bonds. In fact with higher ratings a firm will be able to issue bond at premium compared to the general practice of issuing bond at face value or at discount. Hence, bond ratings are important to firms.

External users purchase bonds of a firm with the expectation of earning high return. Generally, the external users uses the ratings of bonds as the yardstick to purchase bonds of a particular class or company over others. Apart from that the external users will be able to assess the ability of an organization to repay the bond on time by the ratings of the bonds.       

Bond ratings also help in assessing the risk of debt, i.e. the bond holders would be able to assess the risk of investing in particular bond over others by assessing the bond ratings carefully. Bonds with higher rating are obviously mush less risky compared to the bonds that have earned low ratings.

A person who is responsible to assess the bond ratings must do his job properly. The report of such person would determine the amount of faith or otherwise to be shown on particular bonds by the investors. Thus, in case such person fails to perform and discharge his duties then necessary actions must be taken including the option of firing such person from his job.