Question

How does the bond rating affect the interest rate paid by a corporation on its bonds?

Short answer

Bond ratings impact the interest paid by a corporation in a specific manner. The interest rate determination is dependent upon the level of rating. High-rated bonds carry less interest and vice versa.

Step-by-step solution

Bond rating

Bothan investor and issuing corporation are equally concerned about rating their bonds. Moody’s Investor Service and Standard & Poor’s Corporation are two major agencies that provide ratings on the bonds.

Impact of bond rating on the interest rate

The high-rated bonds are considered better because the risk is lower, and low-rated bonds carry high risks. Bondholders of the low-risk category do not require high-interest payments.

The higher rating assigned to the bonds requires fewer interest payments to satisfy the potential investors.If bond ratings are lower, then a corporation may require to pay more interest payments to satisfy the bondholders.

In such a way, bonds ratings impact the corporation’s interest payments.