The following is a summary of the types of issuance, the pricing, and the way in which capital markets are accessed.
A bond is an investment security issued to the capital markets by an entity that requires cash today in exchange for the offer of a promised set of future payments. This is usually structured as a regular coupon payment (equivalent to bank interest) and a repayment of the principal amount. It is essentially an "I owe you." Bonds are commonly issued by corporate entities and governments. Clearly, the value of the promise depends on the creditworthiness of the entity issuing the bond. Corporate entities issue bonds as an alternative to bank lending to finance their activities.
Bonds will commonly be listed on a stock exchange so that they can be freely traded and held by anybody. This provides the benefit to the issuer of ensuring access to as many investors as possible when attempting to raise large amounts of cash.
Over the next few pages, we will describe some of the key features of the capital markets, including:
• credit ratings,
• pricing,
• fixed or index-linked bonds,
• private placement, and
• the process of arranging the finance.
Table 2: Summary of rating levels
| Agency | ||||
| S&P rating | Moody's rating | Fitch rating | Broad definition | Grade |
| AAA | Aaa | AAA | Highest rating. Minimum credit risk, highest credit quality, and capacity to meet financial obligations is extremely strong. | |
| AA | Aa | AA | Still very high quality credit with low credit risk; capacity to meet financial obligations is still strong. | |
| A | A | A | High-quality credit; capacity to meet financial obligations is still strong but is susceptible to adverse changes. | Investment grade |
| BBB | Baa | BBB | Good-quality credit but adverse change is likely to lead to weakened position. | |
| BBB- | Baa3 | BBB- | Moderate-quality credit and may possess certain speculative characteristics. | |
| BB, B, All Cs | Ba, B, All Cs | BB, B, All Cs | Speculative characteristics about the credit risk. | Sub-investment grade |
| D | D | RD, D | Payment default. | |
Source: Author's interpretation of rating definitions from agency websites: Moody's, available at http://www.moodys.com/cust/default.asp; Standard & Poor's, available at http://www.standardandpoors.com/home/en/us; and Fitch Ratings, available at http://www.fitchratings.com/index_fitchratings.cfm.
Note: The focus of the agencies' definitions is on the ability or likelihood of the obligor (person or entity who has obligation to repay debt) to meet their obligations and what protection there is in the event of bankruptcy. This summary shows the main ratings only. There are interim steps (or notches) between these main ratings that are indicated either by a number (1, 2, or 3) or a negative or positive sign. For example, there may be an S&P AA+, AA, and AA- or Moody's Aa1, Aa2, or Aa3.