Credit ratings

To assist investors in assessing the likelihood of a borrower defaulting there are teams of analysts working for credit rating companies who look into the detail of the strengths and weaknesses of the borrower and give a rating to its creditworthiness - a triple-A, AAA, Aaa rating means that the borrower is very unlikely to default.

Corporations issue bonds to raise finance for operations or expansion plans. These bonds may be rated in accordance with their company's rating or may have a rating of their own. They carry a higher risk of default than reputable government bonds and so must pay a higher rate of interest. However, com­panies may find that the payments they have to make on bond coupons are less than they would have to pay for a similar size loan from a bank. They may also find that it is easier to raise large amounts of money by means of a securities issue, whereas a bank may not be in a position to offer the total amount required. When a company issues bonds, it has some control over what cove­nants or restrictions are placed on the issue. Covenants are conditions with which the bond issuer must comply (such as limiting the amount of debt a company can take on).