Bond Ratings
Many investors purchase bonds because bonds are generally a safe investment. Nevertheless, bonds do carry the possibility of risk of default though the risk may be very, very minimal. Bold ratings were developed as a means to show how financially stable the issuer of the bonds really is, though it is not legally required for a bond to have a rating.
Bond ratings indicate the degree of risk associated with buying the bonds. There is an inverse relationship between bond ratings and the interest rates of the bonds. The higher the bond rating, the lower the interest rate because of the decreased risk of default. Conversely, a bond with a low rating will offer a higher interest rate because there is a higher chance of default.
The two most common ratings services are Standard and Poor’s and Moody’s. Standard and Poor’s (S&P) uses capital letters along with pluses and minuses. For example, the highest bond rating is AAA+. Moody’s uses a rating system with a combination of capital and low-case letters. Moody’s also uses a "1" to indicate the best in each category.
Bond ratings fall into two grades: investment grade, which include those in the top four quality categories, and "junk" bonds, which are bonds with a Standard and Poor’s rating BB and below, and a Moody’s rating Ba and below.
Bond Rating Codes
|
Rating
|
S&P
|
Moody's |
|
Highest quality; relatively small degree of risk
|
AAA
|
Aaa
|
|
High quality; revenue source is slightly less
secure than that of triple-A bonds
|
AA
|
Aa
|
|
Upper medium quality; revenue source is
relatively susceptible to fluctuations in relevant economic conditions
|
A
|
A
|
|
Medium grade; adequately protected and secured,
but may be unreliable if relevant economic conditions have long-run
adverse effects on revenue source
|
BBB
|
Baa
|
|
Lower-medium grade; somewhat speculative;
presently adequately protected and secured, but represent long-term
risk whether relevant economic conditions are favorable or not.
|
BB
|
Ba
|
|
Low grade; presently adequately protected and
secured and represent risk regardless of economic conditions; if it is
likely that future relevant economic conditions will be unfavorable,
probability of default is intensified
|
B
|
B
|
|
Low grade; future risks are typical; presently
not adequately protected and secured as present relevant economic
conditions pose a threat to revenue source
|
CCC
|
Caa
|
|
Low grade; high degree of present and future
risk; greater chance of default by issuer; debt issued in same
conditions which produced CCC or Caa rating of a prior issue; given
CCa rating because of additional insecurity of being issued after CCC
or Caa bonds.
|
CC
|
Ca
|
|
Default likely; recovery unlikely; the lowest
rated class of bonds; regarded as having extremely poor prospects of
ever attaining any real investment standing
|
C
|
C
|
|
Payment is due and issuer defaults
|
D
|
