Corporate Bond Ratings

• There are nine bond ratings, according to both Moody's and Standard & Poor's. The top four are given to investment grade bonds, while the bottom five are not. These are usually referred to as speculative grades. If the rating is low enough, they are called junk bonds. Ratings are given based upon the creditworthiness of the corporation. A higher rating means that the company is less likely to default on the debt instruments. The creditworthiness, and therefore the bond rating, can change over time. This is when the rating agency will issue an upgrade or downgrade.
  
  

Moody's and Standard & Poor's

• The two main agencies that provide bond ratings to help investors determine how creditworthy a corporate bond is are Moody's and Standard & Poor's. Moody's ratings are: Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. Standard & Poor's ratings are very similar. They are: AAA, AA, A, BBB, BB, B, CCC, CC and D. Moody's uses a numerical indicator to help decipher small differences between those within any one group, whereas Standard & Poor's uses a plus or minus sign. For example, Moody's will use B1 for a bond from an issuer with a little better credit than that of a B2. In the same situation, Standard & Poor's would use B+ or B- instead.
  
  

Researching a Bond's Rating

• A broker or financial adviser typically has access to all the corporate bond ratings given by both agencies. A private investor may research ratings on his own using financial websites that provide a service to research investments. The easiest method is to visit the websites of the rating agencies and conduct your research by looking for the specific name of the corporation.
  
  

Why Rating is Important

• In general, more risk equals more reward. A greater risk of the company defaulting on the debt instruments should equate to the investor requiring a higher rate of return on the bond. Return, or yield, is a component of the purchase price, length of time until maturity and coupon payments. A lower rating should, at the very least, mean that the the bond is either paying a higher rate of interest than the market rate or selling for a lower price than comparable bonds with higher rates.