- Bond ratings serve to provide investors with a way to judge a bond's risk without having to dissect the bond's terms and the issuers financials.
- The three major bond ratings firms are Moody's, S&P and Fitch. Each rating agency may issue its own rating on any particular bond. These ratings may determine who invests in the bond. Many pension funds and endowments are prohibited from investing in any bonds below a certain grade. Also, bonds rated below BBB are generally considered junk bonds.
- There are several bond rating grades. S&P and Fitch share a bond rating structure that is virtually identical. Moody's employs a separate but mostly equivalent rating scale. For S&P and Fitch, the highest rating is AAA. For Moody's the highest rating is AAA. For Moody's the lowest investment grade rating is Baa3. For S&P and Fitch, the lowest investment grade rating is BBB-.
- The benefit of a bond rating is both that it gives the investor an idea of the bond's security compared to other bonds. Also, since ratings are revisited periodically, they also give an investor a way to know if the bond's prospects have dimmed or brightened.
- A bond rating is no guarantee that the bond is safer than another bond. In fact, since many bond ratings are paid for by the issuer of the bond, there is a possible conflict of interest at the ratings agencies. Critics point out that many of the "toxic assets" responsible for the fiscal crisis that started in 2008 were AAA rated by the rating agencies.
