Aproposed corporate bond issue is usually subjected to a credit risk assessement by credit rating agencies....

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Aproposed corporate bond issue is usually subjected to a creditrisk assessement by credit rating agencies. The results of such anassessement provide a basis for potential investors to makedecisions regarding the proposal.
Some investors consider duration to be useful factor whendeciding whether to invest in corporate bonds. however ,otherinvestors do not consider duration to be that useful and assuch,they rely solely on the work work of credit rating agencies.Such investors consider the information provided by the creditrating agencies to be more useful than duration when choosing thebonds to invest in.
Required
Prepare a report that covers the following
a) A discussion of the factors that contribute to the creditrisk and an explaination of the relationship between credit riskand interest rate risk
b) Identification and explanation of any two(2) approches thatmay be used to assess the degree of credit risk of a proposed bondissue
c) A critical discussion of the usefulness of duration as ameasure of interest rate risk relating to the corpoate bonds
d) An evaluation whether there is a relationship between usingduration and credit ratings when choosing bonds that an investorshould invest in.

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A Credit risk is essentially the risk associated with the ability of a borrower to make timely payments of interest and principal on the debt that has been borrowed On the other hand interest rate risk deals with the risk associated with the change in value of a bond when interest rates change Bonds and interest rates are inversely proportional to each other If the interest rates fall the value of a bond goes up Conversely if the rates rise there will be a decline in value of the bond It is this uncertainty in the value of the bond that leads to interest rate risk The factors that contribute to credit risk are as follows 1 Capacity An analysis of capacity deals with analysing the ability of a borrower to make timely payments of interest and principal Essentially it involves an assessment of the health of the company and the structure of the Industry 2 Collateral This is a crucial part of credit analysis See Answer

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