How to Explain the Moody Bond Rating

Bond ratings measure the creditworthiness of a bond issuer. They measure the risk of holding the bond. The higher the risk, the higher the interest rate the bond issuer must pay to compensate for the risk of default. There are several bond rating agencies but one of the most common and respected one is the Moody ratings. Here is a guide to the various Moody bond ratings.

Instructions

Difficulty: Moderate

1. Understand Moody. Moody is one of the major bond rating agencies. Each agency has its own rating system and its opinion may vary. However, Moody is a major player among bond rating agency and its opinion carries a lot of weight among the investing community.
2. Know how bond ratings are given. When a bond is issued a company will hire Moody or one or more of the bond rating agencies to do an analysis of the company. The bond agency will do a thorough analysis and the company may make a presentation. The higher the rating. the lower the interest rate the company will have to pay when it issues its bonds.
3. Learn what the ratings mean. For Moody its rating ranges from A to C with A being the most secure and safe. The A rated bonds are considered high quality investment grade bonds. The C rated bonds are the most risky and are considered junk bonds. There are also degrees of ratings. For example the highest rating is Aaa but there is lower sub levels such as Aa1 and so forth.
4. Do your own research. While the Moody rating is a good place to start you should do your own research into the company to make your own determination. You may disagree with Moody which may make you change your investment decision.
5. Pay attention to changes in the bond ratings. Bond ratings are changed all the time with new information. The ratings may be upgraded or downgraded depending on the new information. You need to be informed to protect your investments.

Tips & Warnings

• Work with an experienced bond broker to help you understand the rating reports. The bond market can be very volatile so do your research.
• Avoid buying bonds just based on yield--the higher the yield, the riskier the bond. You may lose all your principal investing in high yield "junk" bonds. Make sure you understand the risks.