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... ich is often also referred to as an "international bond." These bonds do not necessarily have to have any 'special' features, as one is automatically built in. As with regular bonds, the holder will receive interest payments throughout the year and the face value when the maturity date is reached. However, when purchasing an international bond, what you are actually doing is investing in another country's currency. Consequently, you must take both the bond price and the currency rate into account. This additional 'investment within an investment' can greatly increase your profit; however, there is also the risk that the country's currency might decline in worth, which in some instances could be quite disastrous.
This last problem can usually be avoided if an investment is made in a country with a relatively stable economy. Another advantage to foreign investment and international bonds is the choice which you are presented with. Because you are expanding into the international marketplace, you have many more choices as to what you may invest in and, if investing internationally, you also have a wide range of interest rates. There are many companies which rate the different bonds on a bond rating scale.
These bond ratings carry with them immense power in the financial marketplace. Many money-lending agencies use these ratings to determine the percentage of interest they will charge others to borrow money. These bond ratings, when changed, may cause a great disturbance in a company and may sometimes even lead to its bankruptcy. Of course, the lower the business is rated on the bond rating scale, the more unstable it will appear to potential investors.
Too, businesses that would be considered unstable would also have to pay a considerably larger rate of interest in order to obtain a loan, while other higher rated businesses would not have to pay quite so much. If a business is unable to make its loan payments, its rating will suffer even more and eventually it will enter a downward spiral until it sinks into the depths of bankruptcy. There are always variations and differences in the rating of companies' bonds on the bond rating scale. This is because of the number of different companies involved in actually doing the rating.
As bond ratings are not derived from applying numerical formulas to financial data, many companies are rated at a level that is higher or lower than the level assigned by other rating agencies. An example of these discrepancies can easily be seen when one looks at the ratings for Calmar Inc. Prior to November 25, 1991, Moody's Investment Service rated Calmar Inc. with a B rating, while Standard & Poor's rating was significantly lower at CCC+. On November 25 of that year, Moody revised its rating to a Ba rating, supporting what they believed to be a strengthening trend. Two days later, Standard & Poor's rating agency decided that the outlook for Calmar Inc had switched from positive to negative.
Both of these decisions were made using the same financial data, yet each agency regarded Calmar's credit quality differently. While Standard & Poor's agency had remarked that the earnings for the year were the same as last year, Moody's agency believed that there was a great potential for further growth. The following are but a few of the rating agencies that one can find in today's financial market: Moody's Investment Service, Standard & Poor's, A. M. Best, Duff & Phelps, and Fitch Investors Service. The two largest rating agencies, Moody's Investment Service and Standard and Poor's, are regarded as the paragons of the rating business.
Below are the ratings used by Moody's Investment Service. MOODY'S INVESTORS SERVICE, INC. Ratings Chart: Aaa. : This is the highest rating a bond can receive. Bonds in this category are of the highest quality. These bonds carry with them the smallest degree of investment risk, often referred to as the "get-edge." Their interest is protected by a large or exceptionally stable margin, and the principal remains secure. Any changes in the economy are not likely to change the financial position of the company.
Aa. : Bonds with this rating are regarded as high quality by all financial standards. The margin of security, however, may not be regarded as large as Aaa bonds. There may also be some slight problems within the company which may make the long-term risks slightly greater than the Aaa bonds. Together with the Aaa group, these bonds comprise what are generally known as the 'high grade' bonds. A: These bonds have many favorable attributes and are considered upper medium grade. The security offered on principal and interest are considered adequate but something may be present which might suggest a susceptibility to weakness later on in the life of the company.
Baa: This is a medium grade rating. Moody's believes these bonds to be poorly secured or not highly protected. The interest and principal payments appear good at the present time; however, the long term is uncertain as some protective elements may be lacking. Ba: The bonds falling under this rating are judged to have speculative elements. The future is not well-guaranteed. The security of principal and interest payments is very moderate.
Uncertainty characterizes bonds in this class. B: Moody's Investment Service believes these bonds to lack characteristics of desirable investment. The assurance of stability in these bonds is small. Caa: Bonds belonging to this category of rating are regarded as poor investments.
These companies may default on some or all of their payments. There may also be considerable elements of danger present with respect to future principal or interest payments by this company. Ca: This is the second worst rating that can be attained by Moody Investment Service Inc. Bonds which fall into this category are highly speculative. Companies listed under this rating often have marked shortcomings. C: Bonds which receive this rating are the lowest rated class of bonds, and companies with this rating can be regarded as extremely poor prospects of ever attaining any real investment standing.
It is quite inadvisable to invest in such companies or corporations. As is evident, there are many different levels on which a bond can be rated. It is no wonder that a bond can be rated at two different levels by two different rating agencies. In many cases, it is merely an investor's opinion of an agency's possible future that decides what rating the bond is to be assigned. Bonds, like many other forms of investment, require potential investors to be aware of current economic conditions.
I would stress that a great deal of money can be made if investors consider selling their bonds before they reach their maturity. As with stocks, previously issued bonds are traded every day. The price they are sold for is determined by what the market will bare, that is, the willingness of others to buy a particular bond. People sell their bonds as the interest rates increase and decrease due to different economic conditions. In fact, the two main determiners of bond prices are interest rates and credit risk.
With respect to the risk of the credit quality of the bond issuer, imagine if you will, investing money in a nation that is in financial ruin, for example, Somalia. The borrower, in this case Somalia, might not be able to pay interest on a regular schedule or return your principal amount as promised in the end. Somalia might default on some or even all of their payments. As is quite evident, this would not be a wise investment, and this is why the Somalian bond prices suffer as there is no demand in the financial market for them.
Bonds issued by the United States federal government are considered to have virtually no credit risk, since the U. S treasury is unlikely to default on a loan. For corporations, however, the possibility of "going broke" is not all that inconceivable. Therefore corporate bond prices fluctuate depending on how well the issuing company is doing in the marketplace.
The other main determinant of bond prices is the interest rates in the current economy. When interest rates rise, bond prices will fall. However, during times of declining interest rates, bond prices will rise. There is quite a logical reason for this change in prices when interest rates fluctuate. When the interest rates fall, many people turn to bonds as there is a greater rate of return. The more people who buy bonds, the greater the demand which leads eventually to higher prices, and for the investor, a large profit on the sale of previously purchased bonds.
Interest rates rising, on the other hand, leads to a lesser demand for bonds and consequently the prices of previously purchased bonds decrease. If you are able to hold onto your bond until the maturity date is reached, temporary changes in interest rates will not affect your financial investment; however, if you need to sell the bond before the marked maturity date, you might have to accept LESS than what you paid for it. This volatility can work to your advantage too, because it is possible that your bond could be worth more at the time you decide to sell. This is why it is important to keep up to date on bond prices. You may be able to make money by simply selling your bond before it's maturity date.
In conclusion, I would suggest that bonds are a wise venue for anybody wanting to financially invest in different corporations or governments. I would caution, however that when selecting a bond, one should seek the guidance of an experienced investor. By choosing a bond that is right for you and your lifestyle, you have the potential of increasing your profits greatly and going home wealthier and happier. Bibliography:
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