What do Bond Rating Agencies do?

bond-rating-agenciesBonds are a form of long term debt and investors who own them need to know about the financial stability of the issuer and its ability to repay the debt.

Rating agencies evaluate the financial strength of bond issuers (governments and corporations) and issue an alpha numeric rating that indicates the level of risk associated with the bond.

The three rating agencies that are often referenced are:

Standard & Poor’s
Fitch Ratings

Each rating agency has a slightly different rating scale (e.g., AAA, BBB, aa1) that quickly illustrates their opinion of the relative financial risk associated with the bond.

Bond ratings affect the interest rate paid and also indicate whether the bond is considered investment grade or non-investment grade (higher risk to the bond investor).

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