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'''Bond ratings''' are used by corporations as an assessment of how credit worthy their debt is. The ratings are based on how likely it is that the issuer of the bond will default on payments to the creditors. There are many different rating agencies that corporations use and each has their own system of rating. This article will discuss the different rating agencies most corporations use, the rating system those companies use, the rating process, and the importance of bond ratings. | '''Bond ratings''' are used by corporations as an assessment of how credit worthy their debt is. The ratings are based on how likely it is that the issuer of the bond will default on payments to the creditors. There are many different rating agencies that corporations use and each has their own system of rating. This article will discuss the different rating agencies most corporations use, the rating system those companies use, the rating process, and the importance of bond ratings. | ||
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| duplicated by the article Bond Rating |
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Bond ratings are used by corporations as an assessment of how credit worthy their debt is. The ratings are based on how likely it is that the issuer of the bond will default on payments to the creditors. There are many different rating agencies that corporations use and each has their own system of rating. This article will discuss the different rating agencies most corporations use, the rating system those companies use, the rating process, and the importance of bond ratings.
The two top bond-rating agencies in the industry are Moody’s and Standard and Poor’s (S & P), although there are other rating agencies such as Fitch, Pacific Credit Rating, Baycorp Advantage, and Dominion Bond Rating Service. These agencies rate the bonds of corporations by assigning them different letter codes. Moody’s and Standard and Poor’s for the most part have the same ratings but the numbers are different. For example, S & P rates AAA as the best type of bond and C as the lowest, while Moody’s rates Aaa as being the highest and D as the lowest. The different letter codes represent bonds which are of investment quality and bonds which are considered low quality, also known as junk bonds. Investment grade bonds are those which are rated higher than Baa (Moody’s) or BBB (S&P) and are considered to be of high quality. Bond rated below Baa or BBB are called speculative or junk bond. These bonds have the lowest amount of risk because the company is in good financial health. Junk bonds are the lowest rated bonds and have ratings of Caa/CCC or lower. These bonds have a great amount of risk involved because even the future in the short-term for these companies is uncertain.
The rating process begins when a company submits an application to the rating agency such as Moody’s, Fitch, or S&P. The request for a rating is usually made several weeks before the company is ready to issue new bonds. In order for the rating agencies to perform their review and analysis, they need to be provided with certain documentation. This includes the preliminary official statement, last audited and unaudited financial statements, the latest budget information, capital outlay plans, all legal documents relating to the security for the bonds, and any other documents related to the issuance of the bonds. After the analysis has been completed a credit report is presented before a rating committee and a rating is assigned and released to the issuer.
Bond ratings are important because companies do default and when they do investors can lose a lot of money. Bond ratings are an indicator for the investor of the default risk involved in purchasing certain bonds. With the ratings investors can make informed decisions on whether or not to purchase certain bonds.
Works Cited List
1. Ross, Westerfield, & Jordan. (2008). Essentials of Corporate Finance (6th ed.). McGraw-Hill/Irwin
2. Chris Stallman (1999). Bond Ratings. Financial Content. http://www.teenanalyst.com/bonds/bondratings.html
3. Bill Lockyer (2007). The Credit Rating Process. Public Finance Division. http://www.treasurer.ca.gov/ratings/process.csp