Standard & Poor's

Definition

Standard & Poor's (S&P) is a financial services company known for its credit ratings, benchmarks, and analytics, specifically providing ratings for various types of debt securities. It plays a crucial role in credit analysis and bond ratings by assessing the creditworthiness of issuers and the likelihood of default, influencing investors' decisions on purchasing bonds and other fixed-income securities.

5 Must Know Facts For Your Next Test

1. Standard & Poor's uses a letter grading system for its credit ratings, ranging from 'AAA' (highest quality) to 'D' (default), providing investors with clear insights into credit risks.
2. The agency evaluates various factors when assigning ratings, including the issuer's financial health, economic conditions, and market position.
3. S&P ratings can significantly affect the cost of borrowing for issuers; higher ratings typically lead to lower interest rates on bonds due to perceived lower risk.
4. The agency also provides additional services like indices, including the S&P 500, which tracks the performance of 500 large companies in the U.S., influencing investment strategies.
5. S&P is one of the 'Big Three' credit rating agencies along with Moody's and Fitch Ratings, dominating the global credit rating industry.

Review Questions

• How does Standard & Poor's influence investor decision-making in relation to bond investments?
  • Standard & Poor's influences investor decision-making by providing comprehensive credit ratings that reflect the likelihood of default on bond issuances. Investors rely on these ratings to assess the risk associated with different bonds, helping them make informed decisions about which securities to purchase. Higher-rated bonds are generally perceived as safer investments, leading investors to favor them over lower-rated options that come with higher risks.
• Evaluate the impact of a downgrade by Standard & Poor's on a company's ability to raise capital through bond issuance.
  • A downgrade by Standard & Poor's can significantly impact a company's ability to raise capital through bond issuance. When a company's credit rating is lowered, it indicates increased risk to investors, often leading to higher interest rates on new bond issues. This rise in borrowing costs can deter potential investors and limit the company's access to necessary funding for operations or expansion. Moreover, existing investors may sell off their holdings due to concerns about the company's financial stability.
• Analyze how Standard & Poor's ratings might correlate with broader economic trends and investor behavior in financial markets.
  • Standard & Poor's ratings often reflect broader economic trends and can have a feedback effect on investor behavior in financial markets. For example, during economic downturns, many companies may face downgrades due to declining revenues and increased risk of default. This can lead to panic selling among investors who react to negative news, causing bond prices to fall and yields to rise. Conversely, during periods of economic growth, upgrades from S&P can boost investor confidence and lead to increased demand for bonds rated higher, showcasing how S&P ratings serve as barometers for both market sentiment and economic conditions.

Related terms

Credit Rating: A credit rating is an assessment of the creditworthiness of a borrower, such as an individual or corporation, which indicates the risk level associated with lending to that borrower.

Bond Rating: A bond rating is a grade given to bonds that indicates their credit quality, helping investors understand the risk associated with investing in those bonds.

Moody's:

Moody's is another major credit rating agency that provides ratings and research for bonds and other debt instruments, similar to Standard & Poor's.