Standard & Poor's

Definition

Standard & Poor's (S&P) is a financial services company known for its stock market indices and credit ratings, which assess the creditworthiness of corporations and governments. S&P plays a significant role in bond risk assessment, providing investors with insights into the likelihood of default and helping to determine appropriate yields for different bonds based on their risk levels.

5 Must Know Facts For Your Next Test

1. Standard & Poor's was founded in 1860 and is one of the oldest financial services companies in the world, providing crucial market intelligence.
2. S&P’s credit ratings range from AAA (highest quality) to D (default), allowing investors to quickly assess the risk associated with specific bonds.
3. S&P Global Ratings evaluates over 1 million ratings across various asset classes, including corporate bonds, municipal bonds, and structured finance.
4. S&P Dow Jones Indices, a division of S&P, is known for popular indices like the S&P 500, which tracks 500 of the largest publicly traded companies in the U.S.
5. The insights provided by Standard & Poor's can influence investment decisions and market behavior, as higher-rated bonds generally attract more investors due to lower perceived risk.

Review Questions

• How does Standard & Poor's influence investor perceptions of bond risk?
  • Standard & Poor's influences investor perceptions of bond risk primarily through its credit ratings. By providing ratings that indicate the likelihood of default for various issuers, S&P helps investors gauge how risky a bond might be. Higher-rated bonds are viewed as safer investments, while lower-rated ones are seen as having a higher risk of default. This assessment directly impacts how investors decide where to allocate their funds and what yields they expect in return.
• In what ways do S&P’s credit ratings affect the bond market dynamics?
  • S&P's credit ratings have a profound impact on bond market dynamics by influencing both pricing and demand. When S&P downgrades a bond's rating, it usually leads to a decline in its market price due to increased perceived risk. Conversely, an upgrade can enhance demand and increase prices. Additionally, institutional investors often have policies that require them to hold only bonds rated above a certain threshold, meaning S&P’s evaluations can determine which bonds are eligible for investment by those entities.
• Evaluate the implications of S&P’s ratings on economic stability and investor behavior during financial crises.
  • The implications of S&P’s ratings on economic stability during financial crises can be significant. For instance, during a downturn, if S&P downgrades multiple entities due to rising default risks, it can lead to a loss of confidence among investors and exacerbate market sell-offs. This creates a feedback loop where falling prices lead to tighter credit conditions, further straining economic stability. On the flip side, if S&P provides favorable ratings during recovery phases, it can encourage investment and foster a more positive outlook among market participants, aiding in economic recovery efforts.

Related terms

Credit Rating: A credit rating is an assessment of the creditworthiness of a borrower, reflecting the likelihood that they will default on their debt obligations.

Bond Yield: Bond yield refers to the return an investor can expect to earn if they hold the bond until maturity, often expressed as an annual percentage rate.

Default Risk: Default risk is the risk that a borrower will be unable to make the required payments on their debt obligations, leading to potential losses for lenders or investors.