Question

What is the role of rating agencies of fixed income securities? What is the highest possible rating? What is the difference between investment grade and speculative grade debt? Give three (3) specific examples of firms and/or municipalities with investment grade or speculative grade debt and include the rating as of Q3 2016 or Q4 2016 or Q1 2017. In your opinion, should the ratings agencies' be held accountable for their "opinions" of firms' fixed income securities?

Answer 1

Part 1 - Role of rating agencies of fixed Income Securities i.e. bonds

Rating agencies provide the ratings based on certain facts and figures to the debt instrument called bonds which shows the credit viability of company.

Investor purchases the bond based on the ratings given by agencies. Rating shows that whether the company is able to meet the interest and principal repayment obligation to investor on time or not or whether such investment is vulnerable.

Part 2 - Highest Possible rating

Highest Possible rating is 'AAA' given by fitch ratings, Moody's and Standard & Poor's ratings.

Part 3 - Difference between Investment Grads debt and Speculative grade debt

Investment grade debt = These securities has credit rating of

'-BBB' (Fitch and Standard & Poor) or 'Baa3' (Moody's) or higher than this. Such rating shows that obligator is able to satisfy the repayment schedule and interest cost

Speculative Grade debt = These securities has rating less than '-BBB' or 'Baa3'. Such securities carry high risk of default in repayment of principal and bearing interest cost.

Part 4 - 3 Examples of Investment grade debt and Speculative grade debt.

Investment grade debt - Microsoft, Exxon mobil and Johnson and Johnson - Credit rating is 'AAA' for Q3 2016, Q4 2016, Q1 2017

Speculative Grade debt - Futura techpark Private limited, Fino Finance Private Limited, Kongta India Private Limited have rating of '-BBB' for Q3 2016, Q4 2016 and Q1 2017.

Part 5 - Yes, Credit rating agencies should be held accountable for their ratings, Opinions, statements, data, analysis and all other things. Investors rely on such ratings to invest. Lack of accountability can lead to big frauds in rating agencies. Credit agencies should also give the proper explanation for lagging behind their expectations.