Rating Agencies

Question 1

A firm must pay to have its debt rated.

Name the most frequently used rating agencies?

Answer 1

• Moody’s
• Standard and Poor’s
• Fitch
  are the most frequently used agencies

Question 2

Rating are based upon what?

Answer 2

1- The probability of default

2- The protection for investors in case of default

Question 3

regarding to rating agencies, rating are determined from corporate information, such as financial statements.
What are the important factors involved in (rating) analysis ?

Answer 3

• The ability of the issuer to serve its debt with its cash flows
• the amount of debt it has already issued
• the type of issue debt
• and the firms cash flow stability

Question 4

A rating may change because the rating agencies periodically review outstanding securities. A decrease of rating cause what?

Answer 4

A decrease in rating may increase the firm’s cost of capital or reduce its ability to borrow long term. One reason that many institutional investor are not allowed to purchase lower-grade securities.

Question 5

A rating agency review of existing securities may be triggered by a variety of factors e.g. :

Answer 5

• A new issue if debt
• an intended merger involving an exchange of bonds for stock
• material changes in economic circumstances of the firm

Question 6

The ratings are significant because higher ratings reduce interest costs to issuing firms.
Lower ratings incur higher required rates of return.

Answer 6

The lower the risk of default, the lower the interest rate the market will demand.