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.

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