Investment is significant for business because it ensures its ability to develop and expand. However, investment organizations do not provide financial support to every company; they need to be sure that the debt will be repaid to protect their own sustainability. In this way, investors make decisions, focusing on the bond credit rating that is provided by credit rating agencies. They include Moody’s Investors Service and Standard & Poor Financial Services LLC. These two organizations are the leaders in the industry, as together, they hold more than half of the world’s market share (CFR.org Staff, 2015). They provide both long-term and short-term credit ratings, assisting investment organizations, and ensuring that they have an opportunity to reach information needed for appropriate decision making.
Moody’s is present in more than 40 countries worldwide, which provides it with an opportunity to conduct thorough research studies and gather data needed to develop the firm’s ratings. Credit analyses it provides are trustworthy, and they are often used by investors. This organization has operated for more than a hundred years already, successfully dealing with the changing industry environment. Standard & Poor is almost 50 years older than Moody’s but is less expended.
It serves almost 30 countries, providing high-quality market intelligence. The organization provides transparency and provides professionals with an opportunity to make a confident decision due to its credit ratings (Kenny, 2017).
The highest rating is the best one. Those companies that gave good bond ratings are financially strong enough to provide all associated payments. In a similar way, a low rating means that the organization is hardly able to pay its obligations. However, bond rating is not stable, which presupposes that it can be both lowered and increased, depending on the company’s financial health. The highest rating deals with A grades, while Bs and Cs are poor grades. Those ratings that are lower are very risky and are rarely considered by investors.
Bond prices can alter depending on the economic environment in the country. For instance, inflation makes them fall significantly. In a similar way, it can be claimed that when this issue is overcome, bond prices rise. This situation can be explained by the fact that the increase in inflation has a negative influence on the income that can be obtained from the provided investment. In other words, the return can worthless with the course of time.
The increase in interest rates has the same influence on bond prices, which presupposes that the decrease of interest rates increases prices. In addition to that, bond prices are influenced by credit ratings that are assigned by credit rating agencies, such as those discussed at the beginning of the paper. This rating reveals the company’s ability to make those payments that are needed to meet all obligations. Being aware of a credit rating, professionals can determine bond prices (OCS, 2017). In this way, the increase in the rating can increase the bond price while its decrease makes the price lower.
Bonds have been considered as good investments for a long time, but the situation seems to change. Currently, for instance, interest rates increase, which has a negative influence on bond prices. Investors cannot benefit from this situation, which makes them dislike bonds. Nevertheless, they cannot ignore the fact that these assets offer price stability and generate interest income. Thus, bonds are good regardless of the increased interest rates because they can provide significant returns.
References
CFR.org Staff. (2015). The credit rating controversy. Web.
Kenny, T. (2017). Bond credit ratings. Web.
OCS. (2017). Three factors that affect bond prices. Web.