What factors determine a bond's rating Why is the rating important to Essay

What factors determine a adhesions place Why is the judge cardinal to the firmlys manager - Essay ExampleA manager essential appreciate that when credit rating of a firm is low it is more expensive to borrow money since firm has to pay full(prenominal) interest on attachments. As a result higher expenses mean lower earning per sh ar. In the windup company get out earn low profits and low impound ratings.Calculation of confederation rating depends on several factors, these factors are enumerated as under- 1. If the firm is dependent on debt for its maximum operations its bond rating will be lower. 2. If firm is not making profits, it is obvious that its share value and bond rating will go down. 3. If a firm gives continuous production with little variations in output, its portfolio will be strong and bond rating will be high. 4. Big firms have strong financial reserves, these firms can absorb financial pressures and investors are comfortable to invest in these firms. Big firms have little chances to default than smaller ones therefore bond rating of these firms are generally high. Fortune 500 companies dwell of big firms. 5. If loan payback faculty of a firm is high, its bond rating is high. 6. Quantitative depth psychology is a major factor in determining bond rating of a firm. It includes following appraisal - a. Capacity and ability of a firm to repay its debts and obligations. b. Determination of bills flow, financial stability, balance of payments and returns, capacity to pay interests, capacity to repay principle and financial cushion available to company. c. Evaluation of cash reserves, revenue, investing history and trends, market standing, current and rising income trends, safe investment of its capital and projected future profits. d. taradiddle to pay back liabilities and projected capacity to pay debts. 7. Qualitative analysis is another factor in determining bond rating. It determines following - a. Willingness and desire of the company to repay its debts. b. Overall management credibility, ongoing projects and investments, future planning and run a risk management. Why is the Bond rating important to the Firms Manager. Bond ratings are not static and show variations depending on issuers financial position. Ratings are extremely important to a firms manager since firms existence depends on bonds ratings. Bond ratings are important to the firms manager due to following reasons- 1. Bond rating is an indicator of default risk by the firm and therefore a measure of competence of the manager. 2. Bond rating has a ingest influence on interest rate of bond and cost of debt for the firm. Low rated bonds are expensive for the firm and the manager to maintain. 3. Mostly institutions purchase bonds. These institutions are bound by law not to invest in low rated bonds. Therefore it is a matter for survival for the manager and his firm to keep bond ratings higher. 4. If the bond rating is high, investors will have con fidence in the firm and invest in bonds. High bond rating indicates that it is less risky to invest in these bonds. 5. In order to succeed, a manager must display thorough understanding of markets where companys bonds and shares are traded. Although sometimes high-risk, bond ratings generally glow approximate financial picture of a firm. 6. If a bond rating is going down, immediate department of corrections are required by firms manager. A firm manager must re evaluate for Tax shelters and avoid depreciation and losses. He must arrange assets to support borrowings and convert assets to cash if there is a requirement. 7. A manager has to appreciate that bond rating has far reaching implications for the excerption and availability of capital structure and ultimate market standing of the firm. 8. A manager must project that bond rating is an indicator for investors about future financial position of the firm. 9. There is another prop to importance of bond ratings many state laws d emand minimum bond ratings for presentation as intelligent investment for insurance, pension funds, trusts and banks. If ratings are lower than acceptable value or fall within speculative range, firms market standing may collapse. 10. A firms desire to main course capital markets is also displayed by its choice of bond rating objective.