The Bond Security's Pricing

The bond security's pricing is an important factor in determining whether investors will consider investing in the various corporate bonds offered in the market. The prices of the two bonds issued, as shown in the appendix, should differ. One of the bonds should be more expensive than the other. Indeed, the prices established for the various bonds depicted in the appendix differ, with the first bond trading at a greater price than the second. The difference in the value of the two bonds derived in the attached appendix is due to the inherent risk each of the bonds possesses (Brealey, Myers, & Allen, 2011). The inherent risk of a given bond determines the demand of the bond issued by a company. The risk of a given bond is reflected by the interest rate since it determined the premium risk the investors are ready to undergo in investing in a given bond. Consequently, a higher interest rate implies that the bond has a higher risk compared to a bond with a lower interest rate (Brealey, Myers, & Allen, 2011).

The Effect of Risk on Bond Price

The higher the risky a bond is, the lower the supply of the bonds in the market due to the less number of investors willing to invest in the risky investments. Thus, the price of the bond will increase since the demand of the bonds by the corporate will be higher than the bond supply. In contrast, a decrease in the inherent risk of the bond as reflected by the interest rate has the effect of causing the bond price to decrease since more investors will be willing to trade the bonds (Damodaran, 2011). Accordingly, the differing prices of the bonds presented are due to the diverse interest rates at which they have been offered to the market. The bond trading at the current market interest rate of 10% has a higher price compared to the bond trading at the current market price of 12%. The 12% interest bond has a lower price since it is more risky compared to the 10% interest rated bond that is trading at a higher price. A demonstration on the effect of the risk factor on the price of a bond is reflected in the chart attached below. The chart below demonstrates that the bond price has an inverse relationship with the interest rate direction.


(Damodaran, 2011)

International Bond Agencies

The three main international agencies involved in the rating of the bonds are the Moody's Investors Service, Standard & Poor's (S&P), and the Fitch Ratings (Brealey, Myers, & Allen, 2011). The three agencies are involved in most of the credit ratings of the bonds been issued by corporate and governments internationally. The companies given a certain rate by the various rating agencies are likely to try to maintain that rate against their outstanding debt to avoid the interest rate risk (Damodaran, 2011). A variation on the rating of the firm's credit has the effect of causing the interest rate demanded by the lenders to change due to the changing risk. This aspect means that a lower rating by the credit rating agencies has the effect of causing the interest rates of the outstanding debts to increase since it signals an increasing default risk. The change in the interest rate of the outstanding debts has the effect of affecting the profitability of the investments funded by the debts due to the changing cost of capital (Damodaran, 2011). Consequently, companies will put much effort in trying to protect their credit rating from varying.


Brealey, R. A., Myers, S. C., & Allen, F. (2011). Principles of corporate finance. New York: McGraw-Hill.

Damodaran, A. (2011). Applied Corporate Finance. Hoboken, NJ: John Wiley & Sons.

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