What do Bond Ratings Mean?

Introduction to Bonds

How safe is your bond? - When you buy bonds, you are taking a risk that borrowers with poor credit ratings may not repay their loans on time, or even at all. Two major services, Moody and Standard & Poor, rate the credit worthiness of bonds. Ratings are based primarily on the credit history and current status of the issuer.

The ratings use a letter system. They go by letters, like at school. The ones with only As in their rating are of high quality. The ones with a B in the rating are of medium quality (except for Moody B rating, which is below medium quality). Bonds with a C are either low quality or extremely low quality.

Bonds are commonly labeled either "investment grade" or "junk" quality (often called "high yield" instead). The less credit worthy the borrower, the higher your risk is of not being repaid what you lend. For that reason, higher risk bonds usually provide a higher interest rate.

You can avoid the issue of credit worthiness entirely by investing in bonds issued by federal government agencies. Repayment of these loans is guaranteed by the Full Faith and Credit of the U.S. Government.

Moody Bond Ratings

    Best quality, with the smallest degree of investment risk.
    High quality by all standards; together with the Aaa group they comprise what are generally known as high-grade bonds.
    Possess many favorable investment attributes; considered upper-medium-grade bonds.
    Medium-grade bonds (neither highly protected nor poorly secured). Bonds rated Baa and above are considered investment grade.
    Have speculative elements; futures are not as well-assured. Bonds rated Ba and below are generally considered speculative.
    Generally lack characteristics of a desirable investment.
    Bonds of poor standing.
    Lowest rated class of bonds, with extremely poor prospects of ever attaining any real investment standing.

Standard & Poor Bond Ratings

    'AAA' is the highest rating assigned by Standard & Poor's. The bond issuer's capacity to meet its financial commitment is extremely strong.
    A bond rated 'AA' differs from the highest-rated obligations only to a small degree. The capacity of the bond issuer to meet its financial commitment on the bond is very strong.
    A bond rated 'A' is somewhat more affected negatively by changes in world and economic conditions than bonds in higher-rated categories. However, the bond issuer capacity to meet its financial commitment on the bond is still strong.
    A bond rated 'BBB' show signs of adequate financial protection. However, unfavorable economic conditions or changing circumstances are more likely to weaken the bond issuer ability to meet its financial commitment.
'BB', 'B', 'CCC', 'CC', and 'C'
    Bonds with these ratings are regarded as having significant risk, even though they may have some positive qualities. 'BB' indicates the least degree of risk and 'C' the highest.
    A bond rated 'D' is in payment default.
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