Standard & Poor's

Definition

Standard & Poor's (S&P) is a financial services company that provides credit ratings, research, and analysis on various financial instruments and entities, including bonds. S&P is one of the largest credit rating agencies globally, helping investors assess the risk associated with different securities by assigning ratings that indicate their creditworthiness. These ratings are crucial for understanding bond risks, as they reflect the likelihood that a borrower will default on their obligations.

5 Must Know Facts For Your Next Test

1. Standard & Poor's was founded in 1860 and has since become one of the most influential credit rating agencies in the world.
2. The agency assigns ratings ranging from 'AAA' (highest quality) to 'D' (default), which help investors gauge the risk associated with various bonds.
3. S&P's ratings are not just about default risk; they also reflect the issuer's ability to repay its debt and the stability of its financial performance.
4. In addition to credit ratings, S&P provides research and analytics, helping investors make informed decisions regarding fixed-income securities.
5. Changes in S&P ratings can significantly impact bond prices; downgrades can lead to higher yields as investors demand more return for perceived increased risk.

Review Questions

• How does Standard & Poor's influence investor decision-making in the bond market?
  • Standard & Poor's influences investor decision-making by providing credit ratings that reflect the risk level associated with various bonds. Investors use these ratings to assess whether they should buy or sell bonds based on their perceived safety and return potential. A high rating may encourage investment due to perceived lower risk, while a low rating might prompt investors to seek alternatives or demand higher yields.
• Discuss the implications of a downgrade in a bond's rating by Standard & Poor's for both issuers and investors.
  • A downgrade in a bond's rating by Standard & Poor's can have significant implications for issuers and investors. For issuers, a downgrade usually results in higher borrowing costs as investors seek additional compensation for taking on more risk. For investors, it may lead to decreased confidence in the bond's safety, prompting them to sell off their holdings, which could further drive down the bond's price and increase its yield.
• Evaluate how Standard & Poor's credit ratings can impact broader financial markets and economic conditions.
  • Standard & Poor's credit ratings can significantly impact broader financial markets and economic conditions by influencing investor behavior and access to capital. A widespread downgrade of corporate or government bonds could lead to increased borrowing costs across sectors, affecting business investments and consumer spending. This ripple effect can contribute to economic slowdowns or volatility, demonstrating how crucial these ratings are beyond individual securities.

Related terms

Credit Rating: A credit rating is an assessment of the creditworthiness of a borrower, indicating the likelihood of repayment of debts based on various financial factors.

Bond Yield: Bond yield refers to the return an investor can expect to earn from a bond, often expressed as an annual percentage of the bond's face value.

Investment Grade: Investment grade is a classification of bonds that indicates a low risk of default, typically assigned ratings of 'BBB-' or higher by rating agencies like S&P.