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Bond Raters and Junk Bond (Case Study Sample)

Question 1: Read the focus on Ethics article below and answer the question - "Can we trust the bond raters?" Has any legislation been introduced as a result of the bond ratings agencies not "getting it right?" Can We Trust the Bond Raters? Moody's Investors Service, Standard & Poors, and Fitch Ratings play a crucial role in the financial markets. These credit-rating agencies evaluate and attach ratings to credit instruments (for example, bonds). Historically, bonds that received higher ratings were almost always repaid, while lower-related, more speculative “junk” bonds experienced much higher default rates. The agencies' ratings have a direct impact on firms ‘cost of raising external capital and investors' appraisals of fixed-income investments. Recently, the credit-rating agencies have been criticized for their role in the subprime crisis. The agencies attached ratings to complex securities that did not reflect the true risk of the underlying investments. For example, securities backed by mortgages issued to borrowers with bad credit and no documented income often received investment-grade ratings that implied almost zero probability of default. However, when home prices began to decline in 2006, securities backed by risky mortgages did default, including many that had been rated investment grade. It is not entirely clear why the rating agencies assigned such high ratings to these securities. Did the agencies believe that complex financial engineering could create investment-grade securities out of risky mortgage loans? Did the agencies understand the securities they were rating? Were they unduly influenced by the security issuers, who also happened to pay for the ratings? Apparently, some within the rating agencies were suspicious. In a December, 2006 e-mail exchange between colleagues at Standard & Poor's, one individual proclaimed, “Let's hope we are all wealthy and retired by the time this house of cards falters.” Question 2: Speculative or lower medium grade bonds are known as "Junk bonds." Describe the purpose of junk bonds and give examples of their use. Who was the "Junk Bond King" prosecuted by former New York City Mayor Rudy Giuliani. What were the charges? + 1. References must be used. The course textbook and Wikipedia will not count as a references. Be aware of bias references. REQUIRED REFERENCES: PRINCIPLES OF MANAGERIAL FINANCE, 6th edition by Lawrence J. Gitman and Chad J. Zutter . Separate the references used in answering each question. 2. It is imperative that the question is answered. Here is an example of Answer to one question. Planning is not useless I do not agree that because of the rapid developments in E-business and E-commerce that planning is useless. Planning is a routine task in the military and civilian environment. The political, economic and social environments around the world, especially in the Middle-east, require military operational planners to develop contingency scenarios to plan future operations and military deployments such as those generated by the Joint Chiefs of Staff prior to Operation Iraqi Freedom (Bowman, 2003). What O'Brien (2004) describes as the scenario approach to planning has already been taking place for many years in the U.S. navy in preparing ships for overseas deployments (Global, 2004). Though the environments are different, both military and private business planning are similar in some aspects and critical for success. Furthermore, O'Briens description of organizational planning, scenario approach and SWOT analysis are similar to military planning. Organizational Planning The organizational planning process is similar to what the U.S. Navy calls the “Fleet Response Plan” for its warships (Global, 2004). The first step of team building entails selection of the shipboard training team members (SBTT) and their five-day training period at the Afloat Training Group (ATG). The second step is the initial assessment of the training and knowledge level of the ship's crew as well as reviewing administrative programs by conducting a Command Assessment of Readiness and Training (CART). The third step is training the crew as required by anticipated deployments to any part of the world in response to a political or economic crisis. The other three steps in the planning process as described by O'Brien (2004) are similar to what the “Fleet Response Plan” entails during the interdeployment training cycle. Finally, an operational plan is conducted for every major evolution onboard the ship. Before the evolution is executed it is thoroughly planned, briefed, executed and debriefed. Scenario approach. The scenario approach is what the SBTT and ATG use to train shipboard crewmembers. What Peter Senge calls virtual world exercises (O'Brien) are scenarios developed to simulate a hostile environment to safely train. During a final environment period, a ship will be in this virtual world for up to a 96 hour period while the ATG assesses the SBTT and crewmembers to determine if the ship is ready to continue the training cycle and deploy with an Aircraft Carrier Battle Group. SWOT analysis The SWOT analysis is also used by the ATG to develop a training syllabus for the ship. During the CART the ATG will inspect and evaluate the ship to determine its strengths and weaknesses. The training syllabus is then developed to schedule training periods and enhanced training opportunities based on observed weaknesses. The threat is not only the anticipated real-world operating environment, but also the threat of poor performance during training and becoming complacent in watch-standing abilities. Conclusion The comparison between the U.S. Navy and the private sector planning process show the many similarities. One reason could be that most senior officers earn their graduate degrees or that many corporate executives have received some type of military training. Not to be omitted is the fact that five of the past six presidents also served in the military or received military training. Planning was not useless when the maximum airspeed of and aircraft was 200 knots. Planning is what has enabled a surface-to-air missile launched by a warship to intercept a warhead from an intercontinental ballistic missile. For the civilian sector, companies have to plan for the future because they need to earn cash (Preston, 2000). References Bowman, S. (2003). Congressional research service. Iraq: Potential for U.S. military operations. (RL31701). Washington, DC: U.S. Government Printing Office. Global (n.d.). Global Retrieved March 27, 2004, from http://www(dot)globalsecurity(dot)org/military/ops/idtc.htm O'Brien, J. (2004). Management information systems. Manageing information technology in the business enterprise. (6th ed.). New York: McGraw Hill Irwin. Preston, R. (2000, July 24). E-business planning must be for the long haul. InternetWeek, 9. source..

Bond Raters and Junk Bond
University Question One
According to Gitman & Zutter (2011), bonds are credit instruments used by corporations to raise investment funds from the public. Different bonds have different values and it is therefore important for an investor to know the value of a bond before purchasing it. The work of valuing bonds is conducted by agencies such as Standard & Poors, Moody’s Investors Service, and Fitch Ratings. Decision of investors to purchase bonds depends significantly on the bond raters. However, the activities of these agencies are suspicious and therefore they cannot be trusted. For instance, some these agencies have been involved in major financial crisis. The raters have attached wrong values to some of the bonds rated. In this, case the value attached to a bond is not a reflection of the risk associated with investment in such a bond. One of the errors made by the bond raters was on bonds that were backed by mortgages. The raters stated that such bonds faced no risk of default. However, there was major default on bonds backed by mortgages especially in 2006 when a significant decline in the price of houses was experienced.
Research indicates that some of the bond raters do not understand the securities they rate clearly (Hassett, 2011, p. 45). In addition, some of the bond raters are influenced by the issuers of the bonds and hence they make wrong decisions about the true value of these securities. With all these activities taking place in the bond rating agencies, it becomes hard to trust them. Relying on information from such bond raters can ...
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