Debt Securities - Bond Ratings

The fact that creditors (bondholders) have precedence over owners (shareholders) does not mean that bonds are without risk. Certainly, federal bonds are the closest thing to a risk-free investment you will find, but any corporation or any other level of government has some chance of defaulting on an issue or ending up insolvent. Credit risk or default risk is the possibility that an issuer will be unable to pay off the principal or even make the interest payment. The higher an issuer's credit risk, the lower the price and the higher the yield on its bonds.

Companies such as Moody's and Standard & Poor's specialize in rating credit. These bond ratings measure quality and safety based on the issuer's financial condition. These rating services evaluate the likelihood that a debt issuer will be able to meet scheduled interest and principal payments.

The Standard & Poor's Rating Hierarchy:

  • The highest ratings - AAA, AA and A - are awarded to companies with a solid, proven record of paying interest and principal in a satisfactory manner.
  • BB, B, CCC and so on down the line indicate less stellar performers.

The following table provides a side-by-side comparison of Moody's and S&P's rating scales. The scale for corporate bonds is the same as that for municipal bonds. Moody's Baa rating, corresponding to S&P's BBB, represents the lowest investment-grade bonds; everything below that line is considered speculative, and issuers are expected to offer higher yields to offset the higher perceived risks.

Moody\'s vs. Standard & Poors Bond Ratings
Bond Rating Grade Risk
Moody\'s Standard &
Poor\'s
Aaa AAA Investment, Highest Quality Lowest Risk
Aa AA Investment, Very High Quality Low Risk
A A Investment, High Quality Low Risk
Baa BBB Minimum Investment Grade Medium Risk
Ba BB Junk, Speculative High Risk
B B Junk, Very Speculative Higher Risk
Caa CCC Junk, Default Possible Higher Risk
Ca CC Junk, Default Probable Extreme Risk
C D Junk, In actual or imminent default Highest Risk


For investors considering buying debt securities, a credit rating is an essential tool. Read more about the importance of credit ratings in the article What is a Corporate Credit Rating?.

Government Debt
Related Articles
  1. Professionals

    5 Reasons Financial Advisors Still Choose Mutual Funds

    Take a look at five primary reasons why financial advisors still choose to recommend mutual funds over other types of investment vehicles.
  2. Professionals

    Internal Advisor Consultant: Career Path & Qualifications

    Discover more about the responsibilities of an internal advisor consultant, the average salary he can expect and the qualifications he will need for the job.
  3. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  4. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  5. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  6. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  7. Professionals

    Series 55

    FINRA Series 55 Exam Guide
  8. Professionals

    Series 62

    FINRA Series 62 Exam Guide
  9. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  10. Professionals

    Series 65

    FINRA/NASAA Series 65 Exam Guide
RELATED TERMS
  1. No results found.
RELATED FAQS
  1. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  2. Do financial advisors have to be licensed?

    Financial advisors must possess various securities licenses in order to sell investment products. The specific products an ... Read Full Answer >>
  3. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center