bond. This exposes the bond investor to call risk. Liquidity may be low.14.3 The value of a bond will be expressed as,
Value of = Annual present Redemption Discount
A bond interest value + value factor
Payable annuity
factor
- Yield to maturity
15.1 The rate of return that an investor receives is called yield to maturity. The rate of
return depends on the risk associated with it. The ratings provided by
independent credit rating agencies are useful to assess the risk.
15.2 A debt rating shows the probability of timely payment of interest and principal by
a borrower. The higher the debt rating, the greater the credibility of the borrower.
It does not recommend any transactions. Its focus will be on credit risk of the
security. A debt rating has nothing to do with the performance of a firm. There
is no legal relationship between debt rating agency and an investor. A debt rating
is not an audit function. It is not enough to make a one time evaluation of risk to
take one time decision; credit rating must be undertaken periodically.
- Analysis of Fixed Income Instruments
16.1 A professional rating firm is likely to provide an unbiased opinion on the credit
rating of a company. The methodology employed by different rating agencies
varies from each other. Following are the common factors, however, that will be
considered by all credit rating agencies.
(a) Growth rate
(b) Industry risk characteristics
(c) Structure of industry
(d) Nature of competition
(e) Competitiveness
(f) Management quality
(g) Earning strength
(h) Business risks
(i) Financial risks
(j) Asset protection
(k) Cash flow
(l) Financial flexibility and