1. Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it?
Referring to the three fundamental principles and three precepts of finance below, integrate a principle, a precept, or both in your response. In addition, integrate 1-2 external credible references to support your thoughts.
FP1: The value of any asset is equal to the present value of the cash flows the asset is expected to produce over its economic life.
FP2: There is a direct relationship between risk and return; as perceived risk increases, required return will also increase (and vice versa), holding other things constant.
FP3: There is an inverse relationship between price and yield; if an asset’s price increases, its return will decrease (and vice versa), holding other things constant.
PR1: The present value of a cash flow (or an asset) is inversely related to its discount rate; increasing the discount rate decreases the present value (and vice versa), holding other things constant.
PR2: The timing of the cash flows of an asset is important; sooner is better (later cash flows are more heavily discounted, reducing their present value).
PR3: The present value of a cash flow (or an asset) is inversely related to its perceived risk; the higher the risk, the higher the discount rate, and therefore the lower the present value.
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