May 2010 demonstrated that rating changes can have a \u9e23 nificant impact on the

May 2010 demonstrated that rating changes can have a

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May (2010) demonstrated that rating changes can have a nificant impact on the bond' s price and the time the rating a ustment is announced. The original ratings assigned to bonds have an impact on their marketability and effective yield. Generally , the three agencies' ratings agree in their assessments. When they do not , the issue is said to have a split rating. 3 Seasoned issues are regularly reviewed to ensure that 3S plit ra tin gs are discussed in Billingsley , Lamy , Marr , and Thompson (1 985) and Li u and Moore (1 987). Studies th at consider shopping for ratings , the acquisiti on of indicative ratings , and ra tin gs bias are Mathis , McAndrews , and Rochet (2009) and Skreta and Veldkamp (2009).
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High grade Medium gra de Sp eculative Default Chapter 12: Bond Fundament al s and Valuation 429 the assigned rating is still valid. If it is not , rev i sio ns are made either upwar d or downward. Revisions are usually done in increments of one r ating grade. The ratings are based on both the company and th e issue. A e r an ev al uat i on of the creditwor t hiness of the to tal company is comp l eted , a company ra t ing is assi gne d t o e f rrm ' s most senior unsecured issue. Al l junior bonds receive lower ratings b ased on inden tu re specifìcations. Al so , an issue could rece i ve a hig h er rating because of credit -en h ancement devices , such as the attachment of b ank letters of credit , surety , or indemnifìcation provisio ns om insu r ance companies- The agencies ass i gn lette r r atings depic t ing what they view as the risk of default of an obli- gatio n . The l etter ratings range from AAA (Aaa) to D. E üb i t 12 .3 describes th e var i ous ratings assign ed by the majo r se rvi ces. Except for sli ght varia t ions in designations , t he meaning and i nterp ret ation are basically the same. The agencies modi the r atings with + and - signs for F it ch and S&P or with numbers (1 -2 - 3) f or Moody 's. As an examp le , an A+ (A1) bond is at the top of th e A - rated group , while A (A3) is at th e bottom of the A category. Fitch AAA AA A BBB BB B CCC CC C DD D , DD , D Moody's Aaa Aa A Baa Ba B Caa Ca C Standard & Poor's AAA AA A B BB BB B CCC CC C D Definition The hi ghest rating ass i gned to a debt inst ru ment , indicating an extreme ly st rong capacity to pay principal and int eres t. B onds in this cat egory are often referred to as gilt-edge securities. High-quality bo n ds by a ll stan dar ds wi th a strong capacity to pay principal and int eres t. Th ese bonds are rated l ower pr i ma rily b ecause the margins of prot ect i on are no t as strong as th ose for Aaa and AAA bonds . Th ese bonds possess ma ny favorab le i nvestment attr i butes , but elements may su ggest a su scepti b il ity to i mpai r me nt give n adve r se eco n omic cha n ges. Bo n ds that are r egarded as having adequate capa ci ty to pay pr incipal and int erest , but they do not have ce rt ain pro- tective el eme n ts , in the eve nt of adve r se economic cond i- tions th at could lead to a weake n ed capacity f or paymen t.
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