Bond Rating Services
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 grade, the lower the coupon.
Bond ratings are expressed as letters ranging from AAA to C. 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 Moody’s Baa3) or better. BB+ (or Moody’s Ba1) or below is considered below-investment grade . Each of the services uses the same basic grading system, with some variations in style. 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+
A2
A
A
Upper medium
A3
A-
A-
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