MCM- Tutorial 5 - MCM Tutorial 5 Week 5 Q1 What are bond...

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Week 5 MCM- Tutorial 5
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Q1. What are bond ratings and why are they important to the issuer and the investor? Bond Rating It’s indicating credit quality/ creditworthiness of bond issuance. Bond ratings grades are assigned to bond issues based on extensive, professionally conducted financial analysis to designate investment quality. Ratings basically point to the default risk of an issue . The higher the rating, the lower probability of default the lower the yield of an obligation. A lower rating means greater default risk and has to be compensated with a higher yield. Uses of Bond Rating Individuals can depend on agency ratings as a viable measure to access creditworthiness of the issuer and the issuer’s default risk. These ratings are objective and reliable because they are done by an independent party. Investors are able to make comparison among bonds in terms of risk and return buy/ sell decision. Eg. S&P striped UK AAA-rating to reflect the increasing risk resulted from Brexit. Moody and Fitch also advocate such action with concern of UK economic.
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Q2. Discuss the limitations of bond ratings.
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  • Fall '16
  • UK, Credit rating agency, Bond rating

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