A firm has a choice between borrowing money from a bank versus issuing public bo

Question

A firm has a choice between borrowing money from a bank versus issuing public bonds for the same amount. Give an example of one item (a ratio or a number, or any other quantitative item but not something like a feeling or impression) that will be part of the credit analysis:

done by the rating agency for the bond issue but not the bank

done by the bank but, for the most part, not the rating agency.

Explain how each item is important for one party but not the other given that both are considering the same loan (in terms of amount of money, length of time, borrowing firm).

Explanation / Answer

The evaluation for a loan is done by the bank, they check the business cashflows and assets the company has, compute the lian to value ratio before loan disbursement.

All the evakyation is done by the bank, the past history of the borrower is takenn into consideration and tge source of income through which the lian will be repaid, so the sole responsiblity of a defaukt lies with the bank.

On the otherhand raising money through bond issyes involves investment banking activities as well as rating agencues.The rating agencies like S&P and modys give ratings to the bond ranging from AAA to D, depebding upon the probability of default, loss given default, managenent of the company,region, sector, industry analysis.They take both market risk as well as credit risk into consideration.

Whereas abank only evaluates the credit risk

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