OSU BA 543 - Bond Rating and Agencies (21 pages)

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Bond Rating and Agencies



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Bond Rating and Agencies

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Lecture Notes


Pages:
21
School:
Oregon State University
Course:
Ba 543 - Financial Markets And Institutions
Financial Markets And Institutions Documents

Unformatted text preview:

Bond Rating and Agencies Wen Hao Lo 5 4 2011 Bond rating features Assessment Information asymmetries between borrowers and lenders Ratings indicate the likelihood of the borrowed money bei ng paid back Each agency has it own rating scale independent assess ment Efficiency Costly and duplicative for purchasers to do their own rese arch Rapid dissemination of information Ratings compare relative risks of different debt issues Ratings scale is a consistent framework for comparisons Bond rating features Duration Last until the bond expires Changes if there is an upgrade downgrade in t he ratings over time Methods Quantitative analysis ratio analysis economic outlook industry analysi s company trends Qualitative analysis management team policy business outlook Rating process Request rating Surveillance Assign analytical team Conduct basic research Meet issuer Issue rating Rating committee meeting Appeals process Source Standard Poor s Corporation S P s Corporate Finance Criteria New York Standard Poor s Corp 1922 p 9 Bond rating industry Investor pays Model 1931 rating incorporated into regulation The U S Office of the Comptroller of the Currency OCC rules 1936 banks prohibited from investing in below inve stment grade bonds the force of law 1959 Xerox game changer 1975 SEC created NRSRO category barrier to entr y A Nationally Recognized Statistical Rating Organization NRSRO is a credit rating agency which issues credit rating the SEC permits ot her financial firms to use for certain regulatory purposes Early 1970s industry switched to Issuer Pays Mo del Major players Three primary agencies Moody s Investors Service Standard Poor s S P Rating Services Fitc h IBCA Inc Moody s Founded in 1909 by John Moody Analyses of Railroad Investments using letter g rades to assess their risk 1914 Moody s Investors Service was incorporate d 1924 Moody s ratings covered nearly 100 perce nt of the US bond market 1970s Moody s expanded into commercial debt Announcements by Moody s of



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