What is a simple way to assess and compare the default risk of publicly traded bonds?

Asked on by lscrivy

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justaguide | College Teacher | (Level 2) Distinguished Educator

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It is not easy to assess the default risk of any institution that has issued bonds which are publicly traded. It involves a thorough study of the bond issuer's financial state, the revenue being earned and the liabilities it has. If the revenue earned is higher than the liabilities there are sufficient funds available with the bond issuer to pay the bond holders the interest due.

A simple way to assess the default risk is to use the credit ratings given to bond issuers by credit rating agencies like Standard and Poor's, Moody's, etc. Also, as the perception of the market that the issuer may default increases, it is forced to issue the bonds at a higher rate of interest. The default risk has to be accommodated for by an increase in the rate.

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