This is a solution of financial Market security assignment in which we discuss financial security and global credit rating, which can help you in your assignments.
The names of three global credit rating agencies are as follows:
- Standard & Poor’s (S&P) – US
- Moody’s – US
- Fitch Group – New York and London
The purpose of a credit rating on a corporate debt issue from the perspective of the borrowers and the investors:
The Credit Rating Agency has a significant position in the market of finance in the today’s era. This agency provides the proper Business Communication level between the lenders and the investors at one end and the borrowers at the other end on the basis of the credit position of the companies of different nations. It is a measure for the analysis of the credit position of the debtors (Langohr & Langohr, 2010).
From the point of view of the borrower, the importance of the credit rating is identified for the public issue of the bonds and the loan facilities. (Burton & Nesiba, 2015)This is the reason for the continuous increment in the debts and the loan facilities in the financial market. The liquidity position and the policies of the companies regarding the Financial Accounting structures are identified easily with the help of the credit rating agencies.
From the point of view of the investors, the safety of the money is evaluated by identifying the reputation of the company in the market. The investor may engage in the assignments for long term, if he is satisfied with the credit rating of the company.
Calculation of the face value of the security:
Total surplus funds available = $ 120000
Yield available = 6.21% per annum
Term of the negotiable CD = 75 days
Face value of the Certificate of deposit = purchase price *(1+ (daily interest rate * term))
= $ 120000 * [1+ (6.21% / 365 * 75)]
= $ 120000* [1.0127]
= $ 121531.23
Dollar return on the CD:
A = P * (1+r/n ) nt
A = Future value
P = initial amount
r = yield rate
n = compounding periods per year
t = number of the years = 75days or 2.5 months
A = $120000 * ( 1 + 0.0621) 2.5/12
A = $120000 * (1 + 0.0621) 0.208
A = $ 121513
Return = A-P
= $121513 – $120000
= $ 1513
- Santosh might seek the services of an investment bank syndicate for the facility of the commercial paper. The commercial paper provides the facility of paying an interest amount on the pre – fixed rate. Many big banks and the financial institutions are engaged in providing these facilities to the investors(Fein, 2011). The short term needs of the banks are easily fulfilled by the issuance of the commercial paper. In this case, the commercial paper is issued at the yield of 8.33 % p.a.
- Role of the underwriters to the issue:
The underwriters play an important role in the issue of the commercial paper. The underwriting contract is done mostly during the public issue. The companies issue the securities and the underwriters take the obligation for approaching the prospective investors and the remaining balance is undertaken by the underwriters themselves. The whole risk of the total issue of the commercial paper is undertaken by the underwriter (Fein, 2011).