Bond Ratings

Standard & Poor's and Moody's are the best-known and most influential credit rating agencies. Their role as raters is to assess the risk of certain bonds through the study of all information provided to the public, and to assign to the issue and issuing company grades that accurately reflect the company's ability to meet the promised principal and interest payments.

 

Bond prices and interest rates are broadly determined by bond categories (zero-coupon, convertible, income, for example). But an issue's exact pricing and coupon are determined by a credit rating. While S&P warns investors that a credit rating is not a recommendation to purchase, sell or hold a particular security, their initial ratings, and revised downgrades and upgrades, greatly affect the attractiveness of the issuance in the eyes of both issuers and holders. Bonds with higher ratings offer lower yields and easier money for the issuer. A lower rating usually results in a lower price on the bond -- a less expensive purchase for the investor, but a riskier investment. In 1991, those who gambled on lower rated bonds (junk bonds) reaped the highest total returns: an average 34.5 percent. One year later, in a less outstanding year for bonds, junk debt took second place in the race for high returns, 18.2 percent compared to 22.4 percent return on convertible debt.

 

Although somewhat different in their letter usage, Standard & Poor's and Moody's both rate bonds in descending alphabetical order from A to C. Standard & Poor's rates some 2,000 domestic and foreign companies; 8,000 municipal, state, and supranational entities; and 1,300 commercial paper-issuing entities. Moody's rates 19,000 long-term debt issues; 28,000 municipals; and 2,000 commercial paper issuers.

 

Bond Rating Codes

Rating	S&P	Moody's
Highest quality	AAA	Aaa
High quality	AA	Aa
Upper medium quality	A	A
Medium grade	BBB	Baa
Somewhat speculative	BB	Ba
Low grade, speculative	B	B
Low grade, default possible	CCC	Caa
Low grade, partial recovery possible	CC	Ca
Default, recovery unlikely	C	C

 

More information on the topic of bond ratings can be obtained from: