Bond Ratings
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Bond Ratings
Credit worthiness is rated by credit-rating agencies, dominated by two giants, Moody’s and Standard & Poor’s, with a distant third, Fitch Investors Service. In effect, these companies rank others based on their chances of defaulting. Note that default does not necessarily mean failing to pay the full interest on the debt, but rather the potential for delays in payment. Once again, I am trying to stress that in valuing assets not only the amount and risk of cash-flows are important, but their timing -when you actually receive the promised cash flows - also plays a major role in determining their value.
The highest quality rating is AAA, followed by AA, and so on. Rating below BBB is referred to as non-investment quality or junk bonds, where non-investment means that certain institutional investors are not allowed by law to invest in these bonds.
Note that U.S. government bonds are not rated as they are considered default free. Moreover, these agencies rate debt issued by corporations as well as munis - those issued by states, counties and municipalities.
| Rating Agencies | Investment Quality | Description | ||
| Moody's | Standard & Poor's | |||
| Aaa | AAA | Highest grade | Very strong capacity to pay interest and principal. | |
| Aa | AA | High grade | Strong capacity to pay | |
| A | A | Medium Quality | Bond is more susceptible to adverse changes. | |
| Baa Ba, B Ca, C |
BBB BB,B CC, C |
Low Quality Speculative" Junk bonds" |
Highly speculative in their ability to meet interest and principal obligations | |
| D | D | In default | interest and/or repayment is in arrears. | |
Note. At times, both agencies use adjustments; S&P uses "+" or "-" to indicated strength or weakness, Moody's uses 1, 2, or 3 , with 1 being the highest.