Bond ratings measure the security and quality of a bond issue, with factors including the financial condition and reputation of the issuer. Ratings services provide a final score ranging from AAA to D, and researching multiple sources is recommended for potential investors.
Bond ratings are understood to be a means of measuring the security associated with a bond, as well as the overall quality of the bond issue itself. There are several factors that go into calculating a credible bond rating, and most considerations center on aspects of the institution issuing the bond offering.
The central consideration in determining the rating of the bonds has to do with the financial condition and reputation of the debt issuer of the bonds. Simply put, the issuer must be able to show reasonable ability to be able to comply with the terms and conditions governing the issuance of the bonds. Demonstrating this degree of financial competence helps ensure that any investor who chooses to purchase one or more bonds from the issue can reasonably expect a return on both the initial investment and any accrued interest that is extended as part of the purchase. In addition to demonstrating the ability to meet the terms of the bond issue, the bond rating process will also consider the issuer’s ability to meet the original interest payment schedule, as well as the schedule to repay the principal investment.
The investor is not left to research and arrive at a bond rating without outside assistance. There are a number of competent ratings service organizations that routinely provide a breakdown of the relevant factors that may affect the bond rating process. After evaluating each factor that is involved in arriving at the rating of the bonds, the service typically uses a simple rating system to provide a single final score on the acquireability of the bond issue. Most services use a rating system that ranges from AAA, indicating the highest possible rating, to a score of D, which represents the least desirable bond issue.
Researching the bond rating is always an excellent decision for the potential investor. While it’s important to take note of the ratings issued by several different services, it’s generally a good idea to dig a little deeper and consider the individual factors that led to the bond rating assigned by a particular rating service. Researching several different sources for bond ratings will help the investor make a more informed decision about whether to purchase the bond or pursue a different investment opportunity.
Smart Asset.
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