Reference no: EM133275382

1. Give insights and/or raise questions that require reflection on what was said in each post below. 

2. Summarize the advantages and disadvantages of seeking ratings. Would there be a situation in which a company may be better off not getting the ratings?

Post 1

Walmart seek to raise $5 million in operating capital through four separate bond issues ahead of expected federal reserve interest rate hike (Souza ,2022). They recently issued 5 billion in new debt.

Walmart has a bond rating from S&P of AA. Moody's Aa2, and Fitch of AA. Debt rated Aa and AA has a very strong capacity to pay interest and repay principal. Together with the highest rating, this group comprises the high-grade bond class.

The debt ratings are an assessment of credit worthiness of the corporate issuer. Bond ratings are only concern with the possibility of default. They are constructed from information supplies sizes cooperation on other sources. These ratings look at the strength of the issue is finances and its prospects. Ratings allow investors to understand how likely a bond is to default, or fails and make its interest and principal payments on time. Bond ratings can reflect some forward-looking information, but they are largely based on historical financial information ( Kenny. 2022). As a result, they do not offer any definitive indication of an entities future performance.

Advantages

• Rating the bonds helps investors make informed decisions and enables bond issuers to build their market reputation.
• When a rating agency gives a better rating to a bond, the issuer is considered financially stable. As a result, the issuing entity becomes trustworthy so far as obtaining credits is concerned.
• Bond rating helps investors stay informed about the latest standing and the strength of a company.
• It lets them select the right set of debt securities.
• Rating a bond helps firms approach the market players, indicating their financial standing.
• Investors use the rating chart to compare the returns and credibility of two different companies and the Bonds they issue

Disadvantages are rating are the opinion of another party, credit rating may not capture fully the credit risk incorporated within the issuer, and rating are slow to update (Hicks,2019).

As of mid-2021, only two U.S. companies had AAA ratings. In recent years, large companies have been more willing to embrace debt as part of an effort to increase perceived value by shareholders.

Post 2

Yes, it is true that businesses are not obligated to have their bonds rated, but in practice, we notice that businesses attempt to do so despite the costs involved because grading bonds indirectly provides the following benefits.

Rating bonds make it simple for businesses to raise money from the market. Rating bonds has advantages for the companies because investors can easily pay more for high-rated bonds than for low-rated bonds. The past performance of the company and other financial information are used by rating agencies to provide a rating. Investors feel considerably more secure as a result than they would with other debt products. Bonds with high ratings have lower float costs than other types of financial instruments. The rating of bonds has become a crucial issue since rating of bonds has become a trend in the current market, which forces the majority of corporations to follow the trend. Companies can raise money in the event of a market downturn solely with the aid of securities with excellent ratings. So it appears that ratings are important in today's financial market, among other things.