Bonds, Their Types and Ratings Essay

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There are several types of bonds. They include government bonds, corporate bonds, and asset-backed securities. Government bonds may be provided by the national government or the lower ranks of government. When issued by the national or federal government, they are referred to as sovereign debt, and they get their support from the capacity of a country to tax the residents and to print currency. Corporate bonds are issued by corporations and form a huge fraction of the entire bond market (Krishnamurthy, Nagel, & Orlov, 2014). Large companies enjoy great flexibility with respect to the debt they can issue as the limit is usually what the market will support. Asset-backed securities (ABS) are bonds issued by banking and financial institutions. They are characteristically set aside for sophisticated and institutional investors but not other people. Asset-backed securities are generated through packaging up the monetary flows created by many comparable assets and issuing them to investors.

Bonds are rated in the form of letters that vary from AAA, the uppermost grade, to C or D, the lowest rating. Several rating services employ the letter grades while combining lower and upper-case letters as a way of distinguishing themselves. The ratings of bonds signify grades that are provided to mark their credit quality (Becker & Ivashina, 2015). Through the use of bond ratings, some rating services come up with assessments of bond issuers’ fiscal strength or their capacity to recompense a bond’s principal along with its interest in a well-timed manner (Chiang, Shang, & Sun, 2017). In this regard, the ratings are meaningful in assisting investors in knowing the credit risks of different companies as they act as report cards for corporations’ acclaim or disapproval. Companies with a high grade are deemed safe investments, whereas risky corporations have a low score.

References

Becker, B., & Ivashina, V. (2015). Reaching for yield in the bond market. The Journal of Finance, 70(5), 1863-1902.

Chiang, W. C., Shang, J., & Sun, L. (2017). Broad bond rating change and irresponsible corporate social responsibility activities. Advances in Accounting, 39, 32-46.

Krishnamurthy, A., Nagel, S., & Orlov, D. (2014). Sizing up repo. The Journal of Finance, 69(6), 2381-2417.

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