Series 50: Bond Rating Services

Bond Rating Services

Before a bond is issued, it is rated according to its creditworthiness. An issuing municipality hires a private ratings service, such as Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings, to assess its financial strength. The rating agency’s evaluation of the issuer’s ability to pay a bond’s principal and interest in a timely fashion will determine the bond’s coupon rate. The higher the grade, the lower the coupon.

Bond ratings are expressed as letters ranging from AAA to D. A triple-A rating is the most desirable, representing an investment grade bond with minimal credit risk. To be considered investment grade, a bond must be rated a BBB- or better. BB or below is considered non-investment grade. Non-investment grade bonds are also called “junk bonds.”

Each of the services uses the same basic grading system, with some variations in style. Here is a sampler:

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