GNT Co is considering an investment in one of two corporate bonds. Both bonds have a par value of $1,000 and pay coupon interest on an annual basis. The market price of the first bond is $1,079.68. Its coupon rate is 6% and it is due to be redeemed at par in five years.

The second bond is about to be issued with a coupon rate of 4% and will also be redeemable at par in five years. Both bonds are expected to have the same gross redemption yields (yields to maturity) The yield to maturity of a company’s bond is determined by its credit rating.

GNT Co considers duration of the bond to be a key factor when making decisions on which bond to invest.

Required:

Among the criteria used by credit agencies for establishing a company’s credit rating are the following: industry  risk, earnings protection, financial flexibility and evaluation of the company’s management.

Briefly explain each criterion and suggest factors that could be used to assess it. (8 marks)