Financial Markets and Financing - Financial Markets and Securities Offerings - Rating Agencies
7 important questions on Financial Markets and Financing - Financial Markets and Securities Offerings - Rating Agencies
Which source and key factors are involved in the determination of ratings?
Key factors are:
- the ability of the issuer to service its debt with its cash flows,
- the amount of debt already issued,
- the type of debt issued,
- the firm's cash flow stability.
Which events cause ratings to change?
- Periodic review of outstanding securities by the rating agencies
- a new issue of debt,
- an intended merger involving an exchange of bonds for stock,
- material changes in the economic circumstances of the firm
What is the effect of a decrease in debt rating?
- Increase a firm's cost of capital = increasing interest rate the market will demand
- higher required rates of return,
- reduce a firm's ability to borrow long-term, because institutional investors are not allowed to purchase lower-graded securities
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What does Standard & Poor's rating A and BBB represent?
- are of 'investment grade' [SU 4!]
- have strong interest- and principal-paying capabilities - What?
- are often the lowest-rated securities that institutional investors are permitted to hold
What does Standard & Poor's rating BB and below represent?
- is speculative for high-risk bonds,
- are 'junk' bonds, which are high-yield or low-grade bonds
What does Standard & Poor's rating CCC to D represent?
- are very poor debt ratings
- the likelihood of default is significant,
- the debt is already in default (D rating)
Are Moody's ratings fundamental different from Standard & Poor's?
The question on the page originate from the summary of the following study material:
- A unique study and practice tool
- Never study anything twice again
- Get the grades you hope for
- 100% sure, 100% understanding
