Bonds

 

Bond Ratings

Bond-rating services are Moody’s, Standard & Poor’s, and Fitch.  The grade a bond receives is based on the rating service’s belief, which is based on financial calculations and the issuer’s ability to meet the interest and principal requirements and evaluation of the potential of default by the issuer.  These services rate most of the publicly-held corporate and municipal bonds.  In addition, some rate treasury and government agency issues.  However, they do not rate privately-placed bonds.  Privately-placed bonds are where investors, usually institutions, purchase bonds directly from the issuer without any public distribution.

The highest rating on bonds is AAA for the best, most financially-secure corporations.  Ratings fall after that with grades as low as either C or D (only Fitch has D ratings).  Debts rated AAA, AA, A and BBB are considered investment grade (considered suitable for purchases by investments).  The higher the bond is rated, the lower the return, and the safer the investment.



The opposite of the safest AAA grade bond is the Junk Bond, also known as high-yield bonds.  These are rated below BBB or BBB3 by Moody’s.  These bonds are issued by organizations that are not rated as investment grade because of a risk of default (not being able to meet their obligations).  These securities are high risk investments, yet because of the risk they have a high-yield debt security, which pays a higher interest rate.  That is why they are also referred to as high-yield bonds.  If you invest in speculative, very risky bonds, you might not only fail to receive the promised interest, but you might lose all or part of the principal if the company goes bankrupt or liquidates.  With these bonds, although you get a great interest rate, you are taking a greater risk that the company may default on the bonds or you will get less than you paid for them.

After a rating is issued, it is reviewed periodically and can change to reflect the current economic health of the company.  A rating change can drastically affect both the value of the bond and the yield it might be able to offer in the future.  The three rating services have different rating systems and sometimes will differ in their opinion of a bond issuer.

 

 

CREDIT RATINGS

 

CREDIT RISK

Moody's

Standard & Poor’s

Fitch

INVESTMENT GRADE

Aaa AAA AAA
Highest Quality Aa AA AA
High Quality (very strong) A A A
Upper Medium Grade (strong) Bba BBB BBB
Medium Grade      
 

NOT INVESTMENT GRADE

     
Lower Medium Grade (somewhat speculative) Ba BB BB
Low Grade (speculative) B B B
Poor Quality (may default) Caa CCC CCC
Most Speculative Ca CC CC
No interest being paid or bankruptcy petition filed C C  
Lower Medium Grade (somewhat speculative) Ba BB BB
In default B B B
Simplified Ratings C CCC CCC