Welcome to the jungle90
‘So?’
‘They get a safe, steady income and their capital is protected. If
the company goes bust, the bond investors are higher up in the
list of who gets paid. It’s perfect for investors who can’t risk their
money. Their money is safe and their income is guaranteed, as
long as the company remains solvent.’
‘What else is wrong about equities for risk-averse investors?’
‘A company doesn’t have a maturity date. It could be like IBM
and outlive us all. Or it could go bust tomorrow. Either way,
there’s no xed maturity. That means no guarantee that investors
get back their original investment.’
‘But if bonds are so safe, why did so many of them collapse in
value during the last nancial crisis?’
‘Too many companies issued too many bonds at a time when the
economy was already collapsing. They weren’t making enough
money to pay the coupons, let alone the principal repayment.
Greed moved the bonds from low risk/low return to high risk/
low return. As rst one company, and then another, failed to pay
their debts, investors cut their losses and sold them.’
He was good. Hell would freeze over before Jerry would concede
that Jonathan Spurrier was a bond expert. But I was certainly
impressed.
Ratings measure risk usually
That evening Perrine and I shared the lift down. She looked
worried. Jerry had told her she’d been selected for the Rapid Fire
Round tomorrow morning. He’d given her advance warning that
the subject was bond ratings.
‘How much do you know about ratings?’
‘Not enough,’ she admitted.
‘I bet I can teach you about them before we get across the bridge.’
‘Go on.’
91Very interesting, Mr Bond
‘The most commonly used ratings system comes from Standard
& Poor’s. Anything rated between AAA and BBB is an investment-
grade bond. That means any investment fund can buy it. At the
top of the pile you’ve got a bond rated AAA, which is pronounced
“triple A”. That means it’s regarded as being risk-free.’
‘What company on earth is risk-free?’
‘None of them, these days. But governments can be very safe,
especially if the country they run is well-developed and highly
protable. The government issues the bond and uses tax money
to pay off the interest. People believe that the UK government
can never go bust.’
‘But countries do go bust, don’t they? What happens to a
country’s bonds when it has nancial problems?’
‘The rating is cut and the price will fall. Some investors may
choose to cut their losses, and others might see it as a chance to
buy. It’s risk and return in action.
‘A rating is meant to sum up all the good things and bad things
about a company or a government. It’s a simple way to show
the risk of a bond. The job of a credit analyst is to work out the
riskiness of a bond, so investors don’t have to wade through
reams of nancial statements and complicated cash ow projec-
tions. The rating is a single measure that sums up all their
research.’
But we were out of time. I handed her this piece of paper.
s
Things you need to know about credit rating agencies
Credit rating agencies are a vital part of the financial world. They
rate governments and companies on the likelihood that they will
pay interest and the principal back to the lender.
A rating is a credit score for a company. Think about the factors
that lenders take into account when you apply for a mortgage or a
fast facts

Get The Devil's Deal now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.