Bond Credit Rating Agencies

Bond credit rating agencies can provide you with valuable information if you are interested in investing in a particular bond. Bond credit rating agencies look at companies in order to give investors an idea of what type of credit risk they are taking on by investing in a company. Here are a few things to consider about bond credit rating agencies.

Bond Credit Rating Agencies

Even though there are many bond credit rating agencies, there are really only three that are considered the standard in the industry. These three companies are the ones most investors turn to when they are looking at bond ratings. These companies are Moody's, Standard & Poor's, and Fitch. All three of these companies have different ratings systems, but they are all considered very reliable resources.

Importance

When you are a bond investor, you are essentially going to be loaning money to companies. Because of this, you want to be able to put money into companies that are good credit risks. If a traditional lender were going to lend money to a company, it would want to see the company's credit report first. Since you cannot look directly at a company's credit report before you invest in it, you need to rely on somebody else to rate the company for you. These credit ratings tell you how safe a particular company is to lend money to. Without these ratings, you would not know if you were investing in a company that was on the verge of bankruptcy or investing in a company that has a strong financial position for the future.

How the Ratings Work

In order to utilize these ratings, you need to have a basic understanding of how they work. Even though the systems are different, in many ways, they are similar. For example, with all three of the major rating agencies, the highest quality of bonds are "AAA." From there, the ratings go down to different letter grades based on the credit risk of each company. With Moody's, as you go down to the next level, you will find bonds that are rated Aa1, Aa2 and Aa3. From there it goes to A1, A2 and A3. Then it drops down to ratings of Baa1 and so on. 

With Standard & Poor's, the ratings will go down to AA+ and AA. The lowest rating that you can get with Standard & Poor's is D. This rating indicates that the company is in default. Fitch's ratings are like those of Standard & Poor's except for a few differences with DDD and D ratings. 

Junk Bonds

As the rating decreases, the company represents a bigger risk to investors. With Moody's, anything at Ba1 or lower is considered a junk bond. With the other two, BB+ or lower is considered a junk-bond. With these bonds, you are going to be able to get a higher interest rate, but you are taking on more risk.

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