Bond issuers are often examined by their own set of rating organizations to gauge their creditworthiness, just as people have their own credit report and rating published by credit bureaus. Moody’s, Standard & Poor’s, and Fitch are the three main rating organizations that assess the creditworthiness of bonds. Their assessment of the issuer’s creditworthiness—in other words, its capacity to make interest payments and return the loan in full at maturity—determines the bond’s rating and, in turn, the yield the issuer must pay to entice investors. To compensate investors for the increased risk, lower-rated bonds typically offer higher yields.
What is the process for determining a company’s bond rating?
Obtain a copy of the bond’s prospectus online, or contact the business to have one mailed to you. Your broker can receive a copy for you if you have a trading account. Examine the prospectus for the CUSIP number, which is normally printed on the first or second page of the prospectus. This unique identification number, which is issued under the Committee on Uniform Securities Identification Procedures system, can be used to find the bond’s credit rating.
What are the two bond rating companies?
Standard & Poor’s Global Ratings, Moody’s, and Fitch Ratings are the three major bond rating organizations in the United States. Each has a distinct letter-based grading system to swiftly communicate to investors whether a bond has a low or high default risk, as well as whether the issuer is financially sound. Standard & Poor’s highest rating is AAA, and if a bond drops to BB+, it is no longer deemed investment grade. The lowest grade, D, denotes a bond that has defaulted. This indicates that the issuer has fallen behind on interest and principal payments to its bondholders.
How do rating agencies score bonds?
In the 1920s, Fitch Ratings, founded in 1913 by John Knowles Fitch, created the AAA through D rating system. S&P Global Ratings has also adopted a similar rating system.
The ratings hierarchy assigns letter grades to debt securities and issuers depending on their risk of default, with AAA signifying the best creditworthiness and lowest risk of default and D denoting a bankrupt issuer. Investment-grade bonds have ratings of AAA, AA, A, or BBB, whereas speculative or junk-grade bonds have ratings of BB, B, CCC, CC, C, or D.
With 13% of the total market share, Fitch is the smallest of the three bond rating companies. Financial institutions account for the majority of its ratings (23.6 percent), followed by asset-backed securities (22%), corporate issuers (16.4%), insurance firms (15.7%), and government securities (11%).
What are your bond ratings?
Bond ratings are assigned letters ranging from “AAA” to “D,” with “AAA” being the highest and “D” being the lowest. Different rating systems employ the same letter grades but differentiate themselves by using different combinations of upper- and lower-case letters and modifiers.
What are AAA bonds, exactly?
AAA is the highest credit rating that any of the main credit rating agencies may give to an issuer’s bonds. AAA-rated bonds have a high credit rating since their issuers are able to satisfy their financial obligations with ease and have the lowest chance of default. The initials “AAA” are used by rating firms Standard & Poor’s (S&P) and Fitch Ratings to identify bonds with the greatest credit quality, while Moody’s uses the identical “Aaa” to indicate a bond’s top-tier credit rating.
Is a BBB credit rating good?
Ratings firms investigate each bond issuer’s financial condition (including municipal bond issuers) and assign ratings to the bonds on the market. Each agency follows a similar structure to enable investors compare the credit rating of a bond to that of other bonds. “Investment-grade” bonds have a rating of BBB- (on the Standard & Poor’s and Fitch scales) or Baa3 (on the Moody’s scale) or higher. Bonds with lower ratings are referred to as “high-yield” or “junk” bonds since they are deemed “speculative.”
What companies have AAA bond ratings?
Credit rating is a financial indicator for possible debt securities investors, such as bonds. Credit rating organizations such as Moody’s, Standard & Poor’s, and Fitch assign these by publishing code designations (such as AAA, B, and CC) to reflect their evaluation of a bond’s risk quality. Bond credit ratings are assigned by Moody’s and include Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, WR, and NR, which stand for ‘withdrawn’ and ‘not rated,’ respectively. AAA, AA, A, BBB, BB, B, CCC, CC, C, D are the bond credit ratings assigned by Standard & Poor’s and Fitch. Microsoft and Johnson & Johnson are the only two firms in the United States with a AAA credit rating. Individual codes are categorized into broad categories such as “investment grade” or “non-investment grade,” or into numerical tiers ranging from high to poor.
In addition to the rating codes, agencies usually include indicators indicating the likelihood of future upgrades or downgrades in the medium term to the current assessment.
For example, Moody’s assigns a Positive (POS, likely to upgrade), Negative (NEG, likely to downgrade), Stable (STA, likely to remain unchanged), or Developing Outlook to a specific rating (DEV, contingent on some future event).
What are the names of the four credit rating agencies?
- Credit rating firms notify investors whether bond and debt instrument issuers will be able to satisfy their obligations.
- With three agencies: Moody’s, Standard & Poor’s, and Fitch, the worldwide credit rating sector is extremely consolidated.
- The Credit Rating Agency Reform Act of 2006 governs CRAs on multiple levels, including their internal processes, record-keeping, and business operations.
- Because of their role in the financial crisis and Great Recession, the agencies have been subjected to intense scrutiny and regulatory pressure.
What are the names of the highest-quality bonds?
Bonds rated Baa (by Moody’s) or BBB (by S&P and Fitch) or above are thought to have a lesser risk of default and obtain higher ratings from credit rating organizations. The yields on these bonds are often lower than those on less creditworthy bonds.