Corporate Financing
Using Bonds
Statistics & Risk
Management
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Why Bonds?
 Issuing bonds do not convey
ownership.
 Considered debt only.
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Bond Sales
 Bond have a face value.
– Discounts
– Premiums
 Interest Rates
 Maturity Dates
 Bonds can be sold and resold at market
value.
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Defaults
 Interest payments and bond pay off have
been put in default.
 Bond Holders get available funds before
stock holders do.
 What happened to General Motors
Bonds/Stocks?
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Bonds Ratings
 Through the years, businesses have been
established who rate the risk of bonds being
issued.
 Base Ratings the bond is evaluated
 Insured Ratings is when the bond is insured
and the rating only applies to the insurer.
 Be careful you understand what the rating is
really evaluating when you buy a bond.
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Moody's credit ratings
Investment grade
Rating
Aaa
Aa1
Aa2
Aa3
A1
A2
Long-term ratings
Rated as the highest quality and lowest credit risk.
Rated as high quality and very low credit risk.
Rated as upper-medium grade and low credit risk.
A3
Rated as medium grade, with some speculative elements and moderate
credit risk.
Baa3
Speculative grade
Rating
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Prime-1
Best ability to repay short-term debt
Prime-1/Prime-2
Best ability or high ability to repay short
term debt
Prime-2
High ability to repay short term debt
Baa1
Baa2
Short-term ratings
Long-term ratings
Prime-2/Prime-3
High ability or acceptable ability to repay
short term debt
Prime-3
Acceptable ability to repay short term
debt
Short-term ratings
Judged to have speculative elements and a significant credit risk.
Judged as being speculative and a high credit risk.
Rated as poor quality and very high credit risk.
Ca
Judged to be highly speculative and with likelihood of being near or in
default, but some possibility of recovering principal and interest.
C
Rated as the lowest quality, usually in default and low likelihood of
recovering principal or interest.
Not Prime
Do not fall within any of the prime
categories
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Special Bonds
 Some special bodies and agencies can
issue Municipal Bonds that pay interest
that is non taxable (Federal Income tax) to
the bond holder.
 What do you think is the reason for this?
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