A:

Rating the creditworthiness of a bond issuer, despite the number crunching, is as much an art form as it is a science. While companies like Moody's and A.M. Best gather and analyze mountains of data, the rating itself comes down to the informed opinion of an analyst or a rating committee.

Not unlike your individual credit score, the organizations that rate bonds look at an issuer's assets, debts, income, expenses and broad financial history. In addition, special attention is given to the trustworthiness of a company to repay previous bond issues on time and in full.

The major bond rating agencies each use a form of scholastic grading scale, with some variation of an "A+" denoting the best rating. In the case of Moody's, ratings range from "Aaa" to "C". Typically, only bonds issued with a "Baa" rating or above are considered "investment grade", or appropriate for more conservative accounts and investors.

Bond ratings are reviewed every six to 12 months. However, a bond may be reviewed at any time the agency deems necessary for reasons including: missed or delayed payments to investors, issuance of new bonds, changes to an issuer's underlying financial fundamentals, or other broad economic developments.

For more on this subject, read The Debt Ratings Debate.

This question was answered by Ken Clark.

RELATED FAQS
  1. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
  2. How are junk bonds rated differently by Standard & Poor's and Moody's?

    Learn how credit rating agencies rate bonds with junk bond status, and understand how downgrade risk can impact the price ... Read Answer >>
  3. Who are the key players in the bond market?

    The bond market can essentially be broken down into three main groups: issuers, underwriters and purchasers. The issuers ... Read Answer >>
  4. How do the returns on municipal bonds compare to those of other bonds?

    Learn how tax-free municipal bonds may provide better returns than other types of bonds, and understand the risks of municipal ... Read Answer >>
  5. Under what circumstances might an issuer redeem a callable bond?

    Understand why an interest rate drop usually compels bond issuers to redeem callable bonds and re-issue them at the new, ... Read Answer >>
Related Articles
  1. Investing

    Why Bad Bonds Get Good Ratings

    Credit ratings are not the only tool to rely on when assessing bonds. Find out why they sometimes fall short.
  2. Financial Advisor

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
  3. Investing

    What does Investment Grade Mean?

    Investment grade is a term used to describe a favorable rating for corporate and municipal bonds.
  4. Investing

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
  5. Investing

    What's a High-Yield Bond?

    A high-yield bond is a bond issued by a company with a very low credit rating.
  6. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  7. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  8. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
RELATED TERMS
  1. Bond Rating Agencies

    Companies that assess the creditworthiness of both debt securities ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer ...
  3. Bond

    A debt investment in which an investor loans money to an entity ...
  4. Moody's

    An independent, unaffiliated research company that rates fixed ...
  5. Moody's Bond Survey

    A weekly publication that reports changes in corporate bond quality ...
  6. American Callable Bond

    A bond that can be redeemed by the issuer at any time prior to ...
Hot Definitions
  1. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  2. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  3. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  4. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  5. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
  6. Porter Diamond

    A model that attempts to explain the competitive advantage some nations or groups have due to certain factors available to ...
Trading Center