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. 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 >>
  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. 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 >>
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

    An Introduction to Individual Bonds

    Individual bonds are better than bond funds and can be a key component to one’s investment strategy.
  5. Investing

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
  6. 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.
  7. Investing

    How Rising Interest Rates and Inflation Affect Bonds

    Understand bonds better with these four basic factors.
  8. Investing

    What's a High-Yield Bond?

    A high-yield bond is a bond issued by a company with a very low credit rating.
  9. 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.
RELATED TERMS
  1. Bond Rating Agencies

    Companies that assess the creditworthiness of both debt securities ...
  2. Moody's Bond Survey

    A weekly publication that reports changes in corporate bond quality ...
  3. Reverse Convertible Bond - RCB

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

    A provision on a bond or other fixed-income instrument that allows ...
  5. Serial Bond

    A bond issue in which a portion of the outstanding bonds matures ...
  6. American Callable Bond

    A bond that can be redeemed by the issuer at any time prior to ...
Hot Definitions
  1. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  2. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  3. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  5. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  6. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
Trading Center