Some two weeks have passed Moody's announced that it was lowering Israel's credit rating from A1 (fifth highest) to A2 (sixth highest). The rating outlook was also lowered from "stable" to "negative".
Now may be a time to assess what it could mean for how bonds issued by Israeli entities could be affected, as the rating agency also later announced the downgrade of the five largest Israeli banks' credit rating to A3.
This is not expected to impact customers, but one market impacted by these changes is the bond market. The Israeli bond market is diverse and broad, consisting of two main segments: the government bond market and the corporate bond market, which includes bonds from companies across various sectors of the economy.
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There are two ways to examine a bond's yield: Yield to maturity is the total return an investor will receive if they purchase the bond at a certain price and hold it until maturity. The current yield is the return an investor will receive if they hold the bond until the next interest payment.
How is bond yield analyzed? Bonds represent a loan to investors who then receive interest payments through the years they hold the bond until the maturity date, upon which they receive the principal. A bond's yield is the summary of interest payments and principal they will receive until the bond reaches maturity.
Bonds from countries or companies with higher credit ratings typically offer lower yields than lower-rated bonds. Rating changes should impact the relevant issuers' bond prices.
Israeli shekel-denominated bonds are subject to a 15% tax on nominal profits. Inflation-pegged or foreign currency-linked bonds are taxed 25% on real profits.
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