Corporate bonds credit rating score and credit rating agency, comparison table and lecture videos

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If a corporation needs additional funds for its expansion or for buying new equipments they can issue corporate bonds. Bonds are loans, so before you buy a bond (lend your money to the bond issuing corporation) it is important to check the credit ratings of these bonds. Many investors believe that all bonds are the same. This is not the truth. Except for federally issued bonds, all bonds carry a potential risk of default (The risk that companies or individuals will be unable to make the required payments on their debt obligations).

Why there is a risk in buying bonds?

Unless a company declare bankruptcy, the chance of non-payment on a bond is pretty slim. Unfortunately, as slim as that risk might be, there are companies that do go into default on their bonds. When that happens, the bond holder not only doesn't get paid their interest payment, but also they're also at risk of losing all the money they have invested in the bond itself. Keep in mind that some bonds are issued with maturities (return of the face value of the bond at a specified future date) of ten years or more. In this fast-paced economy, the business model of many companies will change pretty dramatically over ten years - so you might not own the same type of company you bought 10 years ago.

Credit rating agencies

Currently there are three credit agencies that set the standards for bond quality ratings - Moody's, Standard and Poor's, and Fitch Ratings. Normaly, higher the credit ratings, the lower the bond's yield. Check the table below to see the credit ratings of the three agencies. Bonds with ratings lower than BBB- are considered speculative and pay a higher interest rate since there's a greater risk that the issuing companies might not be able to replay the investor. These bonds are called junk bonds, high yield bonds and non-investment-grade bonds.

Credit Risk
Moody's
Standard and Poor's
Fitch Ratings
Highest Quality
Aaa
AAA
AAA
High Quality
Aa
AA
AA
Upper Medium
A
A
A
Medium
Baa
BBB
BBB
Moody's uses a modifier of 1, 2 or 3 to show relative standing in a category. Standard and Poor's and Fitch Ratings use a modifier of plus or minus. For example, a company with a credit rating of BBB+ is of higher quality than BBB

There are also bond ratings other than mentioned in the table like BB, B, CCC, CC, Ca.. all these are low credit quality or non investment grades.

Comparison of Credit ratings of different countries by Fitch, Moody and S&P

How credit agencies created the global financial cricis

At the end of this article, I have added a very important video about how the credit rating agencies played a central role in this recent global financial crisis.

So can we buy the bonds based on these credit ratings? This is an open question.

Global financial crisis and credit rating agencies

What went wrong with our Credit Rating Agencies? -Lecture

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