Tag: Understanding

Israel Credit Ratings on Review for Downgrade

There was an article in The Straits Times on 21 October about how Moody’s is reviewing the Israeli government’s credit ratings, possibly for a downgrade. Israel and Hamas are currently engaged in a conflict.

Before we go into further details, let’s answer the question of what is Moody’s, and what are credit ratings?

  1. Moody’s is a ratings agency which gives a score to how reliable a borrower is; in other words, how likely a borrower will repay its debts.
  2. The scores rating agencies assign are known as credit ratings.

This move by Moody’s is not surprising, since when a country is involved in war and conflict, more of their resources will be diverted to the war effort, affecting their ability to repay any debts on time. 

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Bond Yields Rising

There has been a lot of talk recently about bond yields rising. This usually happens when central banks decide to raise interest rates. Let’s examine how interest rates affect bond yields. Some concepts that will be used in this analysis:

  1. Risk-free rate of return: A theoretical rate of return on an investment which carries 0 risk. Does not actually exist because every investment has some risk.
  2. Bond: A financial instrument that pays investors a regular, fixed amount of money as interest
  3. Bond yield: The regular payment of the bond interest divided by its price.

Cheat notes: When rates increase, bond yields will rise as bond prices drop. The opposite situation is also true.

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