Definition
Bond Rating: A bond rating is an evaluation method used to assess the creditworthiness and financial strength of bond issuers, including corporations and governmental bodies. It measures the likelihood that the bond issuer will default on its debt obligations.
Examples
- AAA Rating: Microsoft Corporation bonds are often rated AAA by Standard & Poor’s, indicating exceptional financial strength and very low risk of default.
- AA Rating: U.S. Treasury Bonds typically receive AA ratings from Fitch Ratings, reflecting high credit quality with low default risk.
- BB Rating: Bonds from a growing, mid-sized company may receive a BB rating from Moody’s Investors Service, suggesting some speculative elements but still of creditable quality.
- D Rating: A distressed company that has already defaulted on its bond payments might receive a D rating, indicating that the issuer is in default.
Frequently Asked Questions
What is the difference between investment-grade and non-investment-grade bonds?
Investment-grade bonds are those rated BBB- or higher by Standard & Poor’s and Fitch Ratings, or Baa3 or higher by Moody’s. They are considered to have relatively low credit risk. Non-investment-grade bonds (also called “junk bonds”) are rated BB+ or lower and have higher credit risk but potentially higher returns.
Who are the major credit rating agencies?
The three major credit rating agencies are Fitch Ratings, Standard & Poor’s, and Moody’s Investors Service. These agencies evaluate the credit risk of issuers and rate bonds accordingly.
How often are bond ratings updated?
Bond ratings can be updated periodically based on new financial information, market conditions, and other relevant factors. Updates can occur multiple times a year, or whenever significant changes in the issuer’s situation emerge.
How do bond ratings affect interest rates?
Higher-rated bonds (e.g., AAA, AA) tend to offer lower interest rates because they are perceived as lower risk. Conversely, lower-rated bonds (BB or below) must offer higher interest rates to attract investors willing to take on additional risk.
Can bond ratings change after issuance?
Yes, bond ratings can change after issuance if the financial situation of the issuer changes. This is known as a rating upgrade if the new situation improves, or a rating downgrade if it deteriorates.
Related Terms
Credit Risk: The risk of loss resulting from an issuer’s potential inability to meet its debt obligations.
Default: The failure to pay interest or principal on a loan or security when due.
Investment-Grade: Bonds rated BBB- or higher by Standard & Poor’s or Fitch Ratings, and Baa3 or higher by Moody’s.
Junk Bond: Another term for non-investment-grade bonds, typically rated BB+ or lower.
Online Resources
- Investopedia - Bond Ratings
- Standard & Poor’s Global Ratings
- Moody’s Investors Service
- Fitch Ratings
Suggested Books for Further Studies
- “The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau
- “Fixed Income Analysis” by Frank J. Fabozzi
- “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
- “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
Fundamentals of Bond Rating: Finance Basics Quiz
Thank you for exploring the intricacies of bond rating with this comprehensive entry and detailed quiz. Keep aiming for financial literacy and excellence!
