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4. Bond ratings Rating agencies-such as Standard & Poor's, Moody's Investor Services, and Fitch Ratings-assign credit ratings to bonds based on both quantitative and qualitative
4. Bond ratings Rating agencies-such as Standard & Poor's, Moody's Investor Services, and Fitch Ratings-assign credit ratings to bonds based on both quantitative and qualitative factors. The factors used and their importance to the rating given to an individual bond issue are unique to each rating agency. The bond ratings indicate the issue's, and sometimes the issuer's, credit risk, including the risk of default. The issue's default risk rating affects its interest (coupon) rate, which in turn affects the issuer's cost of debt capital. On the basis of these ratings, bonds are classified along a continuum from the higher-rated investment-grade bonds down to the lower-rated junk bonds. Which of the following bonds is more likely to be classified as a junk bond? A bond with a B rating, an 11% yleld, and a debt ratio of 60% A bond with a BBB rating, an 8% yield, and a debt ratio of 42% Consider the bond described in the prior question. You've heard that the rating agencies have downgraded the bond's rating. The yield on the bond is likely to decrease
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