Bond Ratings Explained

Bond rating is in essence an evaluation of the possibility of default by a bond issuer. It is based on an analysis of the issuer's financial condition and profit potential. Bond rating services are provided by, among others, Standard & Poor's andMoody's Investors Service.Bond ratings start at AAA (being the highest investment quality) and usually end at D (in payment default).

Moody's S&P Definitions Aaa AAA AAA- Prime. Maximum Safety.Bonds, which are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa AA+ AA AA- High Grade. High Quality.Bonds, which are judged to be of high quality by all standards. Together with the Prime group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Prime securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Prime securities. A A+ A A- Upper Medium Grade.Bonds, which possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. Baa BBB+ BBB BBB- Medium Grade.Bonds, which are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba BB+ BB BB- Speculative.Bonds, which are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B B+ B B- Highly Speculative.Bonds, which lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa CCC+ CCC CCC- In Poor Standing.Bonds, which are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca CC+ CC CC- Extremely Speculative.These bonds represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C C+ C May be in Default.The lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.

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