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Bond Ratings When an investor or institution buys bonds, they're lending the issuer money. Bond ratings were developed to help these creditors to understand the relative risk involved with the purchase of a bond. They enable the investor to evaluate, and balance, the risk of default with the interest rate, or yield, paid on the security.
Perhaps the most important value bond ratings provide investors is an independent assessment of the bond's risk. Ratings are a third party's assessment of the issuer's ability to make all of their future financial commitments to creditors. As new information becomes available, this data can change a company's financial stability or earnings outlook. The credit rating of the company may change to reflect this new information.
Quality Ratings
When a company's bond ratings are in the news, they're reporting a change in the credit quality of the issuer. A company with a poor rating presents a credit risk to the bond market, banks, and investors. Investors lend companies money by purchasing their bonds. As a creditor of that same company, they're assuming a risk of repayment or nonpayment.
This means an investor has access to several independent sources of information when evaluating the risk of default. For Moody's, this alert system is termed Under Review. For S&P it's called CreditWatch, and Fitch simply calls it Rating Watch. These terms are used to alert investors to a possible, or pending, change in a company's bond rating.
Note: Moody's uses a modifier of 1, 2, or 3 to show relative standing in a category. Standard and Poor's and Fitch Ratings use a modifier of plus or minus.
If a company is carrying a credit rating from Standard and Poor's of BBB-, then it is of lower quality than a company carrying a credit rating of BBB. A company with a credit rating of BBB+ is of higher quality than BBB. A company carrying a credit rating from Standard and Poor's of BBB is of similar credit quality to a company carrying a credit rating of Baa from Moody's.
Bonds carrying a credit rating of Ba or BB and lower are not considered investment grade. Bonds with ratings of Baa or BBB and higher are considered investment grade.