Bond indices represent a company’s outstanding debt relative to its capitalization, used by analysts to determine risk for investors. A ratio of less than 30% leverage is favorable, and companies have criteria for issuing additional bonds based on the current bond ratio. The bond index is a good indicator of performance and should be monitored by both prospective and current investors.
Bond indices are a representation of the percentage of a given company’s outstanding debt relative to the company’s capitalization, as of the last financial period. Often, analysts will use the bond ratio as a means of determining the degree of risk involved for current investors, as well as the risk that potential new investors may incur in the near term.
When determining the capitalization of the company, it is a generally accepted procedure to review the current status of the bonds issued by the company. The capitalization rate is considered equal to the amount of bonds that mature after one year, divided by the same amount, after the principal is added to the amount. Under the most favorable conditions, the bond ratio will indicate a ratio of less than thirty percent leverage. Anything above that percentage level is considered highly leveraged, and may indicate a need to look very closely at the current picture before investing in the company.
The bond index for a company changes as the number of bonds issued increases. For this reason, companies tend to have specific criteria that must be met before additional bonds are issued. In fact, the current bond ratio directly affects the investigation into the feasibility of issuing additional bonds.
While the bond index is not the only factor a prospective investor will consider, it is generally a good idea to consider the current state of the bonds in relation to the corporation’s indebtedness. The bond index can serve as a good indicator of current and anticipated performance, as well as provide a valuable roadmap for more details that the investor should carefully scrutinize before committing any resources to the company. In addition to being an important data point for prospective investors, the bond ratio is also an excellent measure for current investors to monitor. The bond index may affect the decision to seek additional bond issues as they become available, or choose to sell current bonds and seek investment opportunities elsewhere.
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