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Taxable Bonds

Rating and Analyzing Bonds

The followings are some of the agencies that rate fixed income instruments: Moody’s, Standard & Poors (S&P), and Fitch. Rating services research the creditworthiness of issuing corporations and municipalities for their ability to repay interest and principal at maturity. Each credit agency uses a different letter format to express the level of debt rating. For example, S&P and Fitch both use a plus (+) or minus (-) to indicate a bond standing in either the top or the bottom of the rating category. Moody’s; on the other hand, places a 1, 2, or 3 to show a bond is either at the top or the bottom of the rating category. All agencies divide bonds into two major categories: investment grade and speculative grade. Rating agencies evaluate fixed income issues that pay for their services. They also rate fixed income instruments for no fee when the issuer generates enough interest in the market place. In addition, fixed income issues with a small amount of volume may choose not to pay for a rating. This does not mean their debt is speculative. A bond rating, is only a guide, and in no case should be the only determining factor when deciding to purchase such an instrument. Investors need to implement in depth research for evaluating bonds independently of their credit rating. In general, high rated bonds yield low interest rates; and on the other hand, low rated bonds yield high interest rates. Short-term municipal notes are assigned different ratings. Moody’s rates short-term notes from MIG 1 to MIG 4 (Best quality to adequate quality). If a note is speculative, it is listed as SG. S&P rates notes in the same manner, from SP-1 to SP-3, Fitch rates notes with F-1, F-2, and F-3.

 

The following is a credit scale for bond issuers:

Bond Ratings
Standard & Poors/Fitch
Moody's
Grade
Interpretation
High Grade (Investment Grade and Above)
AAA
Aaa
Investment
Highest quality rating of interest and principal payment at maturity.
AA
Aa
Investment
High quality rating of interest and principal payment at maturity.
A
A
Investment
Good quality rating of interest and principal payment at maturity.
BBB
Baa
Investment
Medium quality rating of interest and principal payment at maturity. Slightly speculative.
Speculative Grade (Below Investment Grade)
BB
Ba
Speculative
Speculative (junk) rating. Issuer can possibly miss an interest payment.
B
B
Speculative
Highly speculative (junk) rating. Issuer has missed interest or principal payments.
C
Caa
Speculative
Junk quality rating. The bond pays no interest.
D
D
Speculative
Junk quality rating. Issuer in default, payments overdue.

Source: SIFMA; Fitch; Moody’s; Standard & Poor’s