How do companies like Moody's rate bonds?

By Ken Clark AAA
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.

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