Financial Management: Core Concepts, Third Edition

6.4 Bond Ratings

Suppose we want to know the appropriate discount rate or yield for a bond. The yield to maturity of one bond may be quite different from the yield to maturity of another, much like the different rates of return that we examined in Chapter 5 for different financial assets such as Treasury bills, government bonds, and corporate bonds. As we can see from Table 6.1, bonds have different yields based on different issuers. How can we be sure that we have the right yield for each issuer? We turn to bond rating agencies for their expertise.

Bond rating agencies help assess the default premium for an individual bond issue and hence establish a yield for the bond. The most famous rating agencies are Moody’s, Standard & Poor’s, and Fitch. ...