How Are Bond Ratings Determined?
While not all bonds are rated, most companies and municipalities pay one of the three major ratings agencies to assign a rating to their bonds. The agencies determine bond ratings by thoroughly analyzing an issuer’s financial condition and the status of the market as a whole.Ratings AgenciesThe three primary bond rating agencies are Standard and Poor’s, Moody’s, and Fitch.Types of RatingsBond ratings range from “excellent” to “in default.” The top four grades from each ratings agency are referred to as “investment grade,” while ratings below this are considered “speculative” or “junk.”Letter RatingsInvestment grade bonds are rated AAA, AA, A, and BBB by Standard and Poor’s and Fitch, and Aaa, Aa, A, and Baa by Moody’s. Ratings can be modified upwards or downwards by a “+” or “-” respectively.AnalysisBond ratings are determined by a number of data points, including a company’s debt and legal structure, financial performance, management, and socio-economic factors.Meaning of RatingsIn ad
