BOND RATES-HOW BONDS ARE RATED

A Bond rating is a standard set to govern the worthy and security of bonds. The main reason of bond rating is to determine the financial situation of the bond issuer.

How bonds are rated

Determining the bond issuer financial power

Bonds are guaranteed promises that are given by the issuers to refund the bond with interest rates and the face value after maturity. Investors benefit from the principle returns plus the added interest on the bonds. When determining the bond rates, the self-regulating agencies look deep into issues like income of the organization and the sources of the income. How money making the organization is and how strong is the company supported up by its funds. Those are the parts that assist in the determination of the financial capacity of the organization.

The value and yield of bonds

The credit worthiness of a company plays a significant role in bond refund. The more possible a company refunds the face value and the interest of a bond the greater the value of the bond. When the issuers pay the interest’s rates as guaranteed in the bond, it is less likely to default the payment promise. The investors will ask for a lower interest as they trust the bond is secure. Consequence the higher the value of the bond, the better it is rated and the well the ratings the lower the yield of the bond.

Independent agencies ratings

Independent agency ratings are the most standard and usual type of ratings. Some of the agencies like the Standard and poor Moody, Fitch and Dominion Rating service determine the commercial reports of the bond issuers as a base of the buyer’s ratings. The bond rates are symbolized by alphabetical classifications from ’triple A’ up to D. Triple A is the top position and C is the lowest rank. Several dissimilar agencies can use the same letter rankings although in different grouping.

For example, the Standard and poor ratings service prefers using ’Triple A’ to indicate the highest credit-quality, ’AA’’ and’’ BBB’’ to show the average credit-quality. Junk or high yield bonds are rated in the alphabetical category of ‘’D’’ for principle or interest failure of payment. Bonds are priced differently according to the default risks associated with the particular type of bond.

Normally there is a relationship between bond prices and interest rates. Bonds value decrease when the interest rates go higher, and the reverse also happens. For instance, if you had invested in a bond worth $ 1000 with an interest rate of 4% at the start, and before the bond matures you need to redeem the amount. Moreover, the interest rates go higher to 5% at that period. When you go to trade your bond in the bond market, the potential buyers will compare the value of your bond with other bonds price on the market. After the comparison, you will be given a price for your bond. It shows that your bond will yield more income than when the interest rates are low.

Other factors that affect bond rates may include;

The ultimate value of a bond may be determined by the credit- worthy, type of the bond, the maturity of the bond and the frequency of interest payments. Bonds with like relations will adjust to rates of interest in a similar manner.