Series 82: Bond Ratings

Bond Ratings

Before a bond is issued, it is rated according to its creditworthiness. Private ratings services such as Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings are hired by the issuing company to assess the financial strength of the company. Their evaluation of the company’s ability to pay a bond’s principal and interest in a timely fashion will determine the bond’s coupon rate. The higher the ratings service’s grade, the lower the coupon rate.

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 a minimal credit risk. To be considered investment grade a corporate bond must be rated a BBB- or better. BB+ or below are considered non-investment grade. Each of the services uses the same basic grading system, with some variations in style. The difference of a letter is called a “grade” (AA vs. A), whereas a number of the Moody’s or a plus or minus for S&P and Fitch are called a “notch” (AA+ vs. AA). Here is a sampler:

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