Question

A company's bond ratings might in concept be similar to your own personal credit ratings. Use an example of how someone's personal credit rating might affect their financial life -- and then translate that to how a bond rating might affect a company's financial choices.

Answer 1

Yes it is very true that bond credit rating is similar to personal credit rating for example in india, personal financial credit ratings are issued by TransUnion CIBIL Limited, CIBIL collects and maintains information regarding payment of loans and advances of individuals, the data is updated by member banks and financial institutions to CIBIL, this information is used to generate credit score to the individual and is provided to credit institutions to evaluate and approve loan application. if client CIBIL score is less than the minimum prescribed score, client loan application would be rejected and he will not get loan from the banks or financial instituions.

In the case of Bonds, credit rating issued to a particular issue of bonds by the credit rating agency, will decide whether company should go for debt issue or not. if the credit rating is good, companies can get good response from market about the bond issue and if the rating is poor, this will put a question mark on the company credibility and success of public issue of debt will be in doubt so in this situation companies shall avoid to arrange funds by debt issues.