Bond Ratings

Bonds are generally considered to be less risky than equity (with the exception of junk bonds), and as such often offer a lower rate of return. The credit rating of a company or municipality that issued the bond has a huge impact on the rate of return. Credit ratings are provided by several major ratings agencies, of which the important ones are Moody's, Standard & Poor's and Fitch.

Bond ratings influence the ease, and cost of, obtaining credit by issuing bonds. Higher ratings result in lower cost of credit (borrowing).

Bond ratings are done by credit ratings agency. These agencies will evaluate the probability of default of different bonds from countries to corporations and assign them to a class.

Bonds class start from AAA thus being the more credit worthy to D or Default. Depending on the credit rating agency the class assignment value might be different example AAA may be AA+ for another company. However, it is important to note that these values will be equal.

If a corporation bonds belong to the junk category (Xerox, May 2002), instuitutional investors might have to sell their holdings due to compliance, and the resultant dumping would cause a great drop in the price of the bond

Credit rating agencies may rate companies or countries differently depending on their own perception. Thus we must take into account that this is not a perfect science.