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:
|
Moody’s |
S&P |
Fitch |
Investment Grade / Ability to Meet Obligations |
|
Investment Grade |
|||
|
Aaa |
AAA |
AAA |
Highest quality, minimum credit risk |
|
Aa1 |
AA+ |
AA+ |
|
|
Aa2 |
AA |
AA |
High quality, low credit risk |
|
Aa3 |
AA- |
AA- |
|
|
A1 |
A+ |
A+ | |