Mediaspace scheduled maintenance: Aug 25, 2026 07:00 - 12:00 AM. During this time, videos will be temporarily unavailable. Check status updates.

Lecture

Bond Ratings and Default Spread

In course

MGT-301: Foundations in financial economics

The aim of this course is to expose EPFL bachelor students to some of the main areas in financial economics. The course will be organized around six themes. Students will obtain both practical insights through real-world examples and understand how one can ...

Description

This lecture covers the importance of bond ratings, how they are constructed, and who pays for them. It also delves into Moody's methodology for rating industries, the differences between rating agencies, and how default rates vary between investment-grade and speculative-grade bonds. The lecture further explores the relationship between corporate taxes, leverage, and the optimal capital structure of a firm, using real-world examples from companies like US Airways and Nestlé. Additionally, it discusses the impact of dividends, share repurchases, and the concept of giving money back to shareholders when a firm lacks profitable investment opportunities.

This video is available exclusively on Mediaspace for a restricted audience. Please log in to MediaSpace to access it if you have the necessary permissions.

Watch on Mediaspace

Instructors (3)

Julien Hugonnier

Pierre Collin-Dufresne

Rüdiger Fahlenbrach

RUEDIGER FAHLENBRACH is Full Professor at Ecole Polytechnique Fédérale de Lausanne (EPFL), Switzerland. Formerly on the faculty of the Fisher College of Business of the Ohio State University (USA), he holds a Ph.D. in Finance from the University of Pennsylvania (Wharton). He holds a senior research chair from the Swiss Finance Institute, and is research member at the European Corporate Governance Institute (ECGI). He has research interests in empirical corporate finance, in particular corporate governance and entrepreneurship. Ruediger Fahlenbrach has published in the leading academic journals in finance, including the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies and the Journal of Financial and Quantitative Analysis. Ruediger currently serves a three year term as elected director of the European Finance Association (2018-2020). He is Associate Editor of the Review of Finance, and former associate editor of the Review of Financial Studies and Financial Management. His research has been reported in many large-circulation newspapers such as The New York Times, The Wall Street Journal, The Economist, Le Temps, NZZ, Handelsblatt, Forbes Magazine, USA Today, and Fortune Magazine.

Official source

Related concepts (27)

Capital structure

In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the company's balance sheet. The larger the debt component is in relation to the other sources of capital, the greater financial leverage (or gearing, in the United Kingdom) the firm is said to have.

Credit rating agency

A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may rate the creditworthiness of issuers of debt obligations, of debt instruments, and in some cases, of the servicers of the underlying debt, but not of individual consumers. Other forms of a rating agency include environmental, social and corporate governance (ESG) rating agencies and the Chinese Social Credit System.

Bond credit rating

In investment, the bond credit rating represents the credit worthiness of corporate or government bonds. It is not the same as an individual's credit score. The ratings are published by credit rating agencies and used by investment professionals to assess the likelihood the debt will be repaid. Credit rating is a highly concentrated industry with the "Big Three" credit rating agencies – Fitch Ratings, Moody's and Standard & Poor's (S&P) – controlling approximately 95% of the ratings business.

Capital structure substitution theory

In finance, the capital structure substitution theory (CSS) describes the relationship between earnings, stock price and capital structure of public companies. The CSS theory hypothesizes that managements of public companies manipulate capital structure such that earnings per share (EPS) are maximized. Managements have an incentive to do so because shareholders and analysts value EPS growth.

Dividend

A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business (called retained earnings). The current year profit as well as the retained earnings of previous years are available for distribution; a corporation is usually prohibited from paying a dividend out of its capital.

Related lectures (33)

Peaks-Over-Threshold Model: Implications and Estimation

Explores the Peaks-Over-Threshold model assumptions, implications, and estimation methods, including fitting a GPD model to exceedances.

Credit Risk Management: Models and Challenges

Explores credit risk management challenges, models, and credit derivatives.

Real Estate Co-Financing

Explores real estate co-financing, weighted average cost of capital, debt implications, and leveraging property value for liquidity.

Credit Derivatives: Pricing and Risk Measures

Covers challenges in credit risk and pricing of credit derivatives.

Financial Crises: Analysis and Lessons Learned