What is a Bond Rating?
A bond is only as good as the strength of the institution that issued it. That’s why most corporate bonds are rated by independent rating services such as Standard & Poor’s Corporation and Moody’s Investors Service, Inc. Ratings are estimates of the issuer’s ability to make interest payments during the life of the bond and to repay the principal at the time of maturity. Higher-rated bonds, which are more secure and less likely to default, generally earn lower yields. Lower-rated bonds often earn higher yields – because of the higher risk of default.
Bond ratings are understood to be a means of measuring the safety associated with a bond, as well as the overall quality of the bond issue itself. There are several factors that are involved in calculating a reliable bond rating, with most of the considerations focused on aspects of the institution that is issuing the bond offering. The central consideration in determining the bond rating has to do with the financial condition and reputation of the debt issuer of the bonds. Simply put, the issuer has to be able to present a reasonable ability to be able to honor the terms and conditions that govern the issuance of the bonds. Demonstrating this degree of financial competence helps to ensure that that any investor that chooses to purchase one or more bonds from the issue can reasonably expect the return of both the initial investment and any accumulated interest that is extended as part of the purchase. Along with demonstrating the ability to eventually honor the terms of the bond issue,
