topic15 - I Brief overview of Corporate bonds and the...

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I. Brief overview of Corporate bonds and the default risk associated with them II. Bond ratings A. Who measures this? 1. S&P Moody’s, and Fitch 2. What information do they provide a. All of which provide financial information on firms as well as the credit risk of large corporate and municipal bond issues (pg. 313) B. How they measure default risk 1. Each rating firm assigns letter grades to reflect its assessment of bond safety 2. The top rating is AAA or Aaa. 3. Moody’s modifies each rating class with 1, 2, or 3 suffix( e.g., Aaa1, Aaa2, Aaa3) to provide a finer graduation of ratings 4. The other agencies use a + or – modification III. Measuring bond safety Analysis of key financial ratios A. Bond rating agencies base their quality ratings largely on an analysis of the level and trend of some of the issuer’s financial ratios. B. Coverage ratio 1. Ratios of company earnings to fixed costs 2. Timed-interest-earned ratio ratio of earnings before interest payments and taxes to interest obligations 3. Fixed-charge coverage ratio includes lease payments and sinking fund payments with interest obligations to arrive at the ratio of earning to all fixed cash obligations 4. Low or falling coverage ratios signal possible cash flow difficulties
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This note was uploaded on 09/10/2010 for the course FIN 367 taught by Professor Han during the Fall '08 term at University of Texas.

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topic15 - I Brief overview of Corporate bonds and the...

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