Characteristics of Quality Levels of Bond

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This time I will explain the Characteristics of Quality Levels of Bond

Two systems of the bonds are Moody's and Standard & Poor's. Two of these systems, high-grade means having a low credit risk, or conversely, is a high probability to be paid in the future. The highest-grade bonds by Moody's assigned Aaa by writing, and by Standard & Poor's to AAA writing. The next level is written Aa or AA. Then the third level of the agency's use of writing A. The three next grade is Baa or BBB, Ba or BB, and B. There are also grade C. Bonds in the triple A (AAA or Aaa) is called the primary bond, double

A (AA or Aa) is a high quality single-A issued in the upper-medium grade and triple B (BBB or Baa) is a medium-grade. The four categories are referred to as investment grade. Bonds have a low level elements of speculative or high risk. Usually these bonds are known as high-yield or junk bond (Fabozzi 125).

Here is a bond rating by Standard & Poor's and Moody's are taken from the source: Stephen A. Ross and Randolph W.Westerfield, Corporate Finance (St. Louis: Times Mirror / Mosby College Publishing, 1988). Data are from various editions of the Standard & Poor's Bond Guide and Moody's Bond Guide Sometimes both Moody's and Standard & Poor's uses adjustments to rankings are: Standard & Poor's uses a plus and minus: A + indicates rating of A prime and A-the most low. Moody's uses 1, 2 or 3, where 1 indicates the strongest.

Issuance of credit ratings based on different levels on the following considerations:

A. The possibility of payment capacity and willingness of the obligor to meet its financial commitment on the bonds in accordance with the terms of the bonds.

2. The nature and conditions of such bonds.

3. The protection provided, and the relative position of the bond at the time of bankruptcy, reform organizations, and other preparations under the bankruptcy laws and other legal memepengaruhi rights of creditors.

Depth rating on the bonds is as follows:

a. 'AAA': A bond rated 'AAA' has the highest rating given by Standard & Poor's. Obligors capacity to meet financial commitments on the unusually strong bond.

b. 'AA': A bond rated 'AA' differences with the highest value of the bonds only slightly. Obligors capacity to meet financial commitments on the bond is very strong.

c. 'A': A bond rated 'A' less susceptible to the adverse effects of changes in circumstances and economic conditions of the bonds in the highest rating categories.

d. 'BBB': A bond rated 'BBB' ability to protect mennjukkan parameter. However, economic conditions or adverse changes in circumstances that seem to contribute more to the obligor makes a weak capacity to meet financial commitments of the bonds. The bonds are rated 'BB', 'B', 'CCC', 'CC', 'C' is considered to have significant speculative characteristics. 'BB' indicates

lowest level of speculation and 'C' is the highest. While some bonds seem to have some quality and protective characteristics that may be too heavy and bulky keridakpastiannya or opinion generally, including adverse conditions

e. 'BB': A bond rated 'BB' criticism is not paid less than a speculative issue. However, it faces major ongoing uncertainties or income is in the business, financial, or adverse economic conditions in which the role of the capacity of obligor to meet its financial commitment on the bond is insufficient.

f. 'B': A bond rated 'B' is more easily criticized for not being paid than bonds rated 'BB', but the obligor often meet its financial commitment on the bond capacity. Business, financial, or economic conditions will likely undermine the capacity of obligor or kesudiannya to meet its financial commitment on the bond

g. 'CCC': A bond rated 'CCC' is more easily criticized for not being paid, and depending on the business, financial, or economic conditions are good for the obligor to meet its financial commitment on the bonds. At the time of the business, financial, and adverse economic conditions, obligor does not seem to meet financial commitments on their capacity to bond.

h. 'CC': A bond rated 'CC' is often criticized for not being paid.

i. 'C': Rating 'C' may be used to protect a situation where a bankruptcy petition has been filled or similar action has been taken but payments on this obligasin continues.

j. 'D': A bond rated 'D' is in payment default, the category rating 'D' is used as a bond payment is not made at the right time remains if the period of the applicable grace period does not expire, if Standard & Poor kacuali believe that similar payments will be made before the grace period of time serupa.Rating 'D' is also used in the filling of a bankruptcy filing or the taking of similar action if payments on a bond dangerous (Sharpe, 1999: 393).

Several different types of investors related to investment risks borne:

1. Conservative investors. Tolerance for risk tends to be small. The percentage of stock allocation to investors this type is 100 minus their age. People like this can do a split or division between cash and bonds in an investment. A conservative investor type was 30 years old can invest 70 percent in stocks and 30 percent in bonds and money market securities.

2. Moderate investors. Tolerance for risk is higher than conservative investors. The percentage of stock allocation to investors this type is 110 minus their age.

3. Aggressive investors. High tolerance for risk. The percentage of stock allocation to investors this type is 120 minus their age (Wiles 14)