Banking & Finance Articles - Page 55 of 107

Credit rating is a process to measure the default risk of bonds. There are credit rating agencies in every country that do this. The idea is to keep investors in safe water when it comes to investing. Credit rating agencies follow various methods to measure the ratings, including imminent market prices fallout and the malfunction in the interest rate of bonds, etc.What is a Credit Rating?Credit ratings are an analysis of the risks associated with a financial entity, such as bonds and shares. A rating is assigned to an entity by renowned credit rating agencies after a thorough check of ... Read More

A business may need to know the value of its assets in certain conditions, such as when the business is sold or the assets are replaced. In such circumstances, liquidation and going concern value helps to determine the value of the business. There are differences between liquidation and going concern values.Liquidation ValueAs the name suggests liquidation value shows the value of its assets being sold and liquidity obtained from them. Liquidation value is considered after the termination of the business usually when it is sold.Generally, intangible assets are not calculated while calculating the liquidation value as the prices of intangibles ... Read More

The volatility of a bond price arises from the fluctuation of the interest rates. The volatility of a bond is given by duration and its yield to maturity (YTM). The formula for volatility is given below$$ Volatility = \frac{Duration}{1 + YTM}$$Price VolatilityPrice volatility is represented by percentage bond price change divided by changes in interest rate which is given by $\frac{(𝜕𝑃⁄𝑃)}{𝜕𝑦}$, where is the period required for yield.The degree of volatility is given by the absolute value of $\frac{(𝜕𝑃⁄𝑃)}{𝜕𝑦}$. So, a bond with $\frac{(𝜕𝑃⁄𝑃)}{𝜕𝑦}= −200$ is more volatile than one that had a $\frac{(𝜕𝑃⁄𝑃)}{𝜕𝑦}$ value of 100. The sign of ... Read More

We know that credit rating agencies segment the bonds according to their creditworthiness of the bonds. The credit rating is often represented via letters. In the process, the rating agencies offer different representing designations to make it easier for investors to understand the creditworthiness of the bonds.Here is the list of bonds that are segmented and named by CRISIL −AAA (Triple-A) – Highest Safety – High Investment GradeAA (Double-A) – High Safety – High Investment GradeA – Adequate Safety – Investment GradeBBB (Triple B) – Moderate safety – Investment GradeBB (Double B) – Inadequate Safety/Moderate Risk – Speculative GradeB – ... Read More

Market Value is the current value of a share or security in the market. It shows the price of a share at which it is sold and bought in the stock markets. Market value per share is considered to be higher than book value per share. Market value per share is given by the total market value of shares outstanding divided by the total number of shares.Market value shows varying fluctuations in the daily market conditions and hence the trend of the share for the longer term is analyzed to determine the share's average price. When capital markets are working ... Read More

The yield curve shows the relationship between the maturities of bonds and their yields to maturity. In the normal case, short-term bonds yield less than long-term bonds, and the yield curve is upward sloping. Investors have to be content with lower returns when they invest for the short term. In the case of long-term bonds, the rate must be higher for the investors to achieve a greater ROI (Return on Investment).Why does the yield curve inversion occur?When the yields of short-term bonds return more than long-term bonds, then the yield curves get inverted. An inverted yield curve shows a looming ... Read More

The redeemable bond is a bond with the security of payment after a certain period of time known as maturity. These bonds largely fall in the category of redeemable debt. Issuers of redeemable debt issue them for long-term financing. The interest rates and the principal are usually paid back on maturity as pre-informed while selling the bond by the issuer.How Redeemable Debt Works?Redeemable debts work well for both issuers and buyers. While issuers get capital financing, the buyers get an increased interest on these bonds.Most redeemable debts come with a call option. To overcome the risk associated, the issuers call ... Read More

The interest rates of bonds keep changing in the market and this exposes investors to a risk known as interest rate risks. The interest rate risk is the risk arising due to the fluctuation of interest rates. It is pretty common in the markets and investors to keep a close eye on these types of risks to calculate the value of their portfolio including bonds and equity shares.Bonds with longer maturity have a higher risk than a bond of shorter maturity. For example, in a case of a bond that gives 10% back annually for a par value of INR ... Read More

A perpetual bond is a never-ending bond. They also don't have a maturity value. these bonds just pay the interests in the form of coupons for an indefinite period. Since the interest is paid for theoretically forever, the bond is named perpetual meaning forever.ConsiderationsA perpetual bond is an obligation. It is an obligation only in name because the issuer doesn't have to pay the lump sum and only interests are paid forever.Sometimes, perpetual bonds are preferred instead of dividend stocks. However, the similarities between the two are extremely limited.Dividend interests are not mandatory to be paid. That is in the ... Read More

There are basically three types of bonds in the market −Bonds with maturityPurely discount bondsPerpetual bonds.In this article, we will see how the bonds with maturity are valued. Bonds with maturity have a maturity date on which the bond's value with the interest payment is returned to the investor.Note − There are three types of bonds depending on their characteristics, but the bond with a maturity is the most common among them.Bonds with MaturityGovernments usually offer bonds that have a given interest rate and a maturity period. The net present value of a bond is its period of cash flows ... Read More