Bond Rating Agencies

AAA

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.

INVESTOPEDIA EXPLAINS '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. Bond Covenant

    A legally binding term of an agreement between a bond issuer ...
  2. Bond Purchase Agreement

    A legally binding document between a bond issuer and an underwriter ...
  3. Bond Violation

    A breach of the terms of a surety agreement. A bond violation ...
  4. Dim Sum Bond

    A bond denominated in Chinese yuan and issued in Hong Kong. Dim ...
  5. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  6. Bond

    A debt investment in which an investor loans money to an entity ...
Related Articles
  1. Junk Bonds: Everything You Need To Know
    Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

  2. The Advantages Of Bonds
    Investing

    The Advantages Of Bonds

  3. Corporate Bonds: An Introduction To ...
    Bonds & Fixed Income

    Corporate Bonds: An Introduction To ...

  4. Introduction To Investment Diversification
    Investing Basics

    Introduction To Investment Diversification

comments powered by Disqus
Hot Definitions
  1. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  2. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  3. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  4. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  5. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  6. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
Trading Center