DEFINITION of 'Bond Rating Agencies'

Companies that assess the creditworthiness of both debt securities and their issuers. In the United States, the three primary bond rating agencies are Standard and Poor's, Moody's and Fitch. Each uses a unique letter-based rating system to quickly convey to investors whether a bond carries a low or high default risk and whether the issuer is financially stable.

Bonds are rated at the time they are issued, and both bonds and their issuers are periodically reevaluated to see if a ratings change is warranted. Bond ratings are important not only for their role in informing investors, but also because they affect the interest rate that companies and government agencies pay on their issued bonds.

BREAKING DOWN 'Bond Rating Agencies'

For example, Standard and Poor's highest rating is AAA - once a bond falls to BB+ status, it is no longer considered investment grade, and the lowest rating, D, indicates that the bond is in default (the issuer is delinquent in making interest and principal payments to bondholders).

Since the 2008 financial crisis, ratings agencies have been criticized for not identifying all of the risks that could impact a security's creditworthiness, particularly in regard to mortgage-backed securities that received high credit ratings but turned out to be high-risk investments. Investors are also concerned about a possible conflict of interest between the rating agencies and the bond issuers, since the issuers pay the agencies for the service of providing ratings. Because of these and other shortcomings, ratings should not be the only factor investors rely on in assessing the risk of a particular bond investment.

RELATED TERMS
  1. AAA

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

    A type of insurance policy that a bond issuer purchases that ...
  3. Bond

    A debt investment in which an investor loans money to an entity ...
  4. American Callable Bond

    A bond that can be redeemed by the issuer at any time prior to ...
  5. Reverse Convertible Bond - RCB

    A bond that can be converted to cash, debt or equity at the discretion ...
  6. Call Provision

    A provision on a bond or other fixed-income instrument that allows ...
Related Articles
  1. 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 ...
  2. Personal Finance

    The Power of Major Credit Rating Agencies

    The performance of major independent credit rating agencies is a controversial topic, particularly due to the strength of their influence.
  3. 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.
  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 does Investment Grade Mean?

    Investment grade is a term used to describe a favorable rating for corporate and municipal bonds.
  6. 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.
RELATED FAQS
  1. Does a good credit rating guarantee repayment?

    Learn how credit ratings help investors determine the creditworthiness of an issuer and the risk associated with making an ... Read Answer >>
  2. How long are credit ratings valid?

    Learn how credit ratings are issued and how long they are valid. Investors look to credit ratings to determine risk associated ... Read Answer >>
  3. What are the risks of investing in a bond?

    The most well-known risk in the bond market is interest rate risk - the risk that bond prices will fall as interest rates ... Read Answer >>
  4. What are the highest-yielding investment grade bonds?

    Learn how Standard & Poor's and Moody's rate bonds. Understand what investment grade bonds offer the best yield. Read Answer >>
  5. How do companies like Moody's rate bonds?

    Rating the creditworthiness of a bond issuer, despite the number crunching, is as much an art form as it is a science. While ... Read Answer >>
Hot Definitions
  1. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  2. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  5. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  6. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
Trading Center