The bond rating of Tesla-Free-Samples for Studetns-Myassignment

Questions: 1.What do you think about Teslas bond rating? 2.Would your answer change if the firm raised an additional $1 billion in bonds to meet production objectives? 3.What is the expected PD (Probability of Default) for Tesla for the next five years? Answers: 1.Depicting about Teslas bond rating: The bond rating of Tesla has not changed after the issue of bonds for $1.8 billion, which indicates the relevant subordinated debt to more senior debt. This directly indicates that the company will portray low priority to the bond in comparison with other bonds. Hence, the bond debt of $1.8 billion that is taken by the company is mainly considered a subordinate debt in comparison with other debt accumulated by Tesla. Chen et al. (2014) mentioned that the identification of bond priority is mainly essential for investor, as it helps in understanding the risk level of their investment. Therefore, the overall bond rating provided by SP and Moodys is mainly same as the firms overall rating, which should not be the same case. The overall bond rating should be reduced, as the debt is mainly considered as subordinated debt to more senior debt. This overall evaluation directly indicates that Tesla during difficult time will focus its priority in senior debt and reduce propriety level of subordinated debt. This could eventually increase the overall risk of the investment for investors and reduce their return generation capacity. Therefore, the rating that is provided by both SP and Moodys for Tesla is relatively higher in nature. Hence, bond rating could be reduced from B- in SP and B3 ratio in Moodys rating to Caa1 in Moodys and CCC+ in SP, as substantial risk is associated with the bond investment. Bonsall (2014) mentioned that use of adequate bond rating directly allows the investors to understand the overall risk level of the investments, which they are conducting. 2.Whether the answer will change if the firm raised an additional $1 billion in bonds to meet production objectives: Yes, from the evaluation of bond rating it could be identified that if Tesla increases the bond value then the rating of the bond needs to be declined further. Firstly, the bond issued by Tesla is mainly a subordinate debt, which has the least priority for the company, if financial position of the company deteriorates. The relevant decline in financial position of the organisation could directly affect returns provided from bond issued by Tesla. In addition, decline in financial performance of the company could directly affect its ability to pay bonds, as the bond is in the high risk yield section (Sinclair 2014). Therefore, the organisation could eventually allow the investors to detect financial stability, which might detect the bond return provided from investment. Hence, the overall credit rating of the organization is relatively declining in nature if additional $1 billion is added to the bond debt of Tesla. Therefore, bond rating is currently viewed at B- in SP and B3 ratio in Moodys rating, which could directly change to Caa1 in Moodys and CCC+ in SP as the bond investment is highly risky. On the other hand, if the overall increment in debt of bond could eventually raise the level of credit rating to Caa2 in Moody and CCC ratio in SP, which depicts the increased risk level associated with investment. The further decline in bond rating is mainly due to extreme speculative nature of the debt, as the company is gathering higher amount of debt, which could directly affect its financial stability. 3. Calculating the expected PD (Probability of Default) for Tesla for the next five years: Particulars Value Treasury (i) 2.05% Corporate (k) 5.30% Probability of repayment 96.91% Probability of default 3.09% From the overall evaluation of the above table relevant probability of default for Tesla could be identified. In addition, the relevant probability of default is relatively lower, which directly indicates that the company will eventually provide the required payments to its bond holders. There if only 3.09% chance for Tesla to default its bond payments according to the calculation of probability default. This could eventually allow the investor to gauge into their investment scope and risk. Leow and Jonathan (2016) mentioned that with the help of relevant investment calculations and rating bond holders are able to detect the financial stability of the organisation to pay back their debt. Hence, from the overall evaluation it could be understood that Tesla will adequately pay its debt incurred from bond within the 8 years of operations. References Bonsall, Samuel B. "The impact of issuer-pay on corporate bond rating properties: Evidence from Moody? s and SP? s initial adoptions."Journal of Accounting and Economics57, no. 2 (2014): 89-109. Chen, Zhihua, Aziz A. Lookman, Norman Schrhoff, and Duane J. Seppi. "Rating-based investment practices and bond market segmentation."The Review of Asset Pricing Studies4, no. 2 (2014): 162-205. Leow, Mindy, and Jonathan Crook. "The stability of survival model parameter estimates for predicting the probability of default: Empirical evidence over the credit crisis."European Journal of Operational Research249, no. 2 (2016): 457-464. Sinclair, Timothy J.The new masters of capital: American bond rating agencies and the politics of creditworthiness. Cornell University Press, 2014. United States Rates and Bonds. 2017.Bloomberg.Com. Accessed November 20 2017. https://www.bloomberg.com/markets/rates-bonds/government-bonds/us.