Subject: Bonds - Moody Bond Ratings

Last-Revised: 12 Nov 2002
Contributed-By: Bill Rini (bill at, Mike Tinnemeier

Moody's Bond Ratings are intended to characterize the risk of holding a bond. These ratings, or risk assessments, in part determine the interest that an issuer must pay to attract purchasers to the bonds. The ratings are expressed as a series of letters and digits. Here's how to decode those sequences.

Rating "Aaa"
Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Rating "Aa"
Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities.
Rating "A"
Bonds which are rated A possess many favorable investment attributes and are considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Rating "Baa"
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected not poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Rating "Ba"
Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
Rating "B"
Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments of of maintenance of other terms of the contract over any long period of time may be small.
Rating "Caa"
Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Rating "Ca"
Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
Rating "C"
Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.

A Moody rating may have digits following the letters, for example "A2" or "Aa3". According to Fidelity, the digits in the Moody ratings are in fact sub-levels within each grade, with "1" being the highest and "3" the lowest. So here are the ratings from high to low: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, and so on.

Most of this information was obtained from Moody's Bond Record. Portions of this article are copyright 1995 by Bill Rini.

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