Bond rating agencies include Moody's Investor Service, Standard andPoors, Fitch Investors Service and others, all of which evaluate the creditworthiness of companies throughout a bond's life. Each agency has slightlydifferent rating criteria. Figure 16.1 provides Bond Rating Definitions forMoody's Investor Service. The rating of individual company bonds can befound for Moody's and Fitch's at their respective websites:www.moodys.com and www.fitchratings.com.Figure 16-1 Bond Rating Definitions for Moody's Investor service2
Bonds and preferred stock which are rated Aaa are judged tobe of the best quality. They carry the smallest degree of investment risk andare generally referred to as "gilt edged." Interest payments are protected by alarge or by an exceptionally stable margin and principal is secure. While thevarious protective elements are likely to change, such changes as can bevisualized are most unlikely to impair the fundamentally strong position ofsuch issues.
Bonds and preferred stock which are rated Aa are judged tobe of high quality by all standards. Together with the Aaa group theycomprise what are generally known as high-grade bonds. They are ratedlower than the best bonds because margins of protection may not be as largeas in Aaa securities or fluctuation of protective elements may be of greateramplitude or there may be other elements present which make the long-termrisk appear somewhat larger than the Aaa securities.
Bonds and preferred stock which are rated A possess manyfavorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest areconsidered adequate, but elements may be present which suggest asusceptibility to impairment some time in the future.
Bonds and preferred stock which are rated Baa areconsidered as medium-grade obligations (i.e., they are neither highlyprotected nor poorly secured). Interest payments and principal security appearadequate for the present but certain protective elements may be lacking ormay be characteristically unreliable over any great length of time. Suchbonds lack outstanding investment characteristics and in fact have speculativecharacteristics as well.