What Does an AA Financial Rating Mean?
Two of the three major U.S. financial rating agencies give an "AA" rating to bonds or other long-term debt securities as a shorthand estimation of how much risk there is that the holder of the bond or security will lose the investment. In both agencies' rating systems, AA denotes a very low-risk investment, only one step below the least risky investment.
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Rating Agencies
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Since it isn't possible for individual investors to know everything about every corporate or other bond issue, rating agencies specialize in assessing the risk involved with each investment. The three major U.S. agencies are Fitch IBCA, Standard & Poor's and Moody's. They all employ similar rating systems, though with some differences among them, and one agency--Moody's--does not offer an AA rating, but rather an Aa rating, which is comparable to AA.
Fitch
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According to Fitch, AA designates "very high credit quality" for long-term corporate or other bonds. That means that the risk of default on the bonds is very low, because, notes Fitch, the issuer of the bonds has a "very strong capacity for payment of financial commitments." An AA rating under the Fitch system might also carry a + (plus) or - (minus) to denote a weaker or stronger standing within the AA category.
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Standard & Poor's
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Standard & Poor's AA letter rating means that the bond issuer has a "very strong capacity to meet financial commitments," in the company's phrasing. "The likelihood of default is the single most important factor in our assessment of creditworthiness," states the company. An AA rating under the Standard & Poor's system might also carry a + (plus) or - (minus) to denote a weaker or stronger standing within the AA category.
AA Compared to Other Ratings
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AA is relatively high within both the Fitch and Standard & Poor's systems. In fact, only the designation AAA is higher in both cases. The rating A is just below AA, and ratings that begin with B and C represent a scale of increasingly risky investments. Both Fitch and Moody's designate their lower ratings as BBB, BB, B, CCC, CC and C, in order of relative safety. At the bottom of both systems is D, which means that the entity that issued the bond is already in default and thus unlikely to make payments to bondholders.
Ratings Not Absolute
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The rating agencies are quick to point out that AA, or any other rating, represent highly informed opinions, not absolute measurements of the likelihood of a default, since the future cannot be predicted absolutely. Nor are the ratings recommendations about whether to buy or sell (or hold), according to the agencies. As Standard & Poor's puts it, "the AA rating isn't a guarantee that it will not default, only that, in our opinion, it is less likely to default than the BBB bond."
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References
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