CandleFocus Glossary Editor
Bond ratings are an automated credit score used to evaluate the quality of debt instruments and calculate the creditworthiness of their issuer. The two main agencies that assign bond ratings are Standard & Poor's and Moody’s Investors Service which have different rating alphabets. Standard & Poor's (S&P) assign ratings in the range of AAA to BBB-, while Moody's range is Aaa to Baa3.
Bonds with higher ratings are regarded as being of higher quality and of less volatility risk, and as such they are also considered less likely to default, or not meet its payment obligations, than those with lower ratings. For this reason, bonds with higher ratings tend to feature lower interest rates than those with lower ratings. Bonds that are rated lower than BBB– by S&P, or Baa3 by Moody’s, are considered to be non-investment grade, otherwise known as “junk bonds”.
The rating for a specific bond is determined by evaluating the issuer's financial strength, including analysis of its ability to generate sufficient funds to make timely payments of interest and principal. This includes consideration of the issuer's financial status as well as any external factors that could impact the issuer's ability to pay investors back. Bond offering documents help to inform whether the issuer can be expected to meet their payment obligations, and research is also conducted on the issuer by the rating agencies to determine its financial capacity, the security of its payment stream, and its legal ability to meet the debt.
A rating agency typically assigns a separate and independent rating to each currently issued bond or debt issue, and these ratings may be updated as debt market conditions and issuer's creditworthiness evolve. Ratings may be revised as a result of changes in the issuer's situation, or because of newly available information, such as changes in the economic environment.
Bond ratings are an important measure for investors to consider when selecting a bond for a portfolio. Investors should look for ratings from both S&P and Moody's to get the relevant information for their decision making. Generally, investment grade bonds, those with ratings of BBB- or higher by S&P and Baa3 or higher by Moody’s are considered safe and unlikely to default; however, investors should do their own due diligence when assessing investments.
Bonds with higher ratings are regarded as being of higher quality and of less volatility risk, and as such they are also considered less likely to default, or not meet its payment obligations, than those with lower ratings. For this reason, bonds with higher ratings tend to feature lower interest rates than those with lower ratings. Bonds that are rated lower than BBB– by S&P, or Baa3 by Moody’s, are considered to be non-investment grade, otherwise known as “junk bonds”.
The rating for a specific bond is determined by evaluating the issuer's financial strength, including analysis of its ability to generate sufficient funds to make timely payments of interest and principal. This includes consideration of the issuer's financial status as well as any external factors that could impact the issuer's ability to pay investors back. Bond offering documents help to inform whether the issuer can be expected to meet their payment obligations, and research is also conducted on the issuer by the rating agencies to determine its financial capacity, the security of its payment stream, and its legal ability to meet the debt.
A rating agency typically assigns a separate and independent rating to each currently issued bond or debt issue, and these ratings may be updated as debt market conditions and issuer's creditworthiness evolve. Ratings may be revised as a result of changes in the issuer's situation, or because of newly available information, such as changes in the economic environment.
Bond ratings are an important measure for investors to consider when selecting a bond for a portfolio. Investors should look for ratings from both S&P and Moody's to get the relevant information for their decision making. Generally, investment grade bonds, those with ratings of BBB- or higher by S&P and Baa3 or higher by Moody’s are considered safe and unlikely to default; however, investors should do their own due diligence when assessing investments.