Bond Rating

Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.

The Bond Rating of any particular bond issued by a company in the Bond Market is basically an evaluation of the bond and a basis for comparing the specific bond with similar other bonds available in the Bond Market. Generally, an AAA is considered to be the highest Bond Rating and a D, the lowest.

The Bond Rating of any particular bond is provided to make the investors (rather, lenders) to be aware of the value of the bond in terms of its quality and the risks involved in buying that bond. The Bond Rating, in this way provides a lot of assistance to the potential investors in the bond markets. Those who are interested in investing in the bond market can compare and find out the most profitable bonds that are available in the bond market, at the same time involving the minimum risks on the part of the lender.

The Bond Rating services are the financial organizations which carry out elaborated analysis of the financial performances of a particular business concern and then releases reports regarding the competency of that particular business organization in repaying the debts incurred by it, as a result of the money invested in it by the lenders.

The competency of any particular company in repaying debts is determined by taking into account, the payments made by the company to the owners of debt securities (which were issued by it), at the time of its maturity, consistently over the years. A favorable grading in these financial analyses, not only improve the faith that investors have in companies issuing bonds but may also improve the total economic condition of the company.

The most prominent Bond Rating services are very influential as the grades received by business concerns from these financial organizations largely affect the costs involved with the borrowing, on the part of these companies. A lower Bond Rating automatically involves higher risks involved on the part of the lenders, who therefore restrain from lending their money to these companies. As a result of the lower Bond Rating, companies desperately in need of finances have to offer higher rates of interest (Coupon Rate) to allure the lenders to invest in them.

However, higher Bond Rating reflects the consumer satisfaction as well as the lesser risks which are involved, therefore potential investors are automatically attracted by the prospect of a favorable investment. Investors are naturally attracted by higher rates of interest but the risks involved always deter them from investing in companies through the buying of debt securities in the form of bonds, issued by business organizations in the bond markets. This is where the instrument of Bond Rating plays a very significant role.

Bond Rating allows the investors or lenders to compare the economic performances of all the companies over the years, for a considerably long time. So, the potential investors can take a look at the rates of interests offered on the bonds issued by different companies and at the same time also take into consideration the Bond Rating of the company, to decide upon the bond that is most profitable without risking much. This is a logical method because deciding upon the bonds of a particular company by only considering the higher rates of interest offered may lead to total losses.

Usually the companies that do not have a creditable Bond Rating offer the highest rates of interest in the bond market to allure lenders and finally do not pay up the money lent to them by the lenders. Or it may also happen that the companies offering the highest rates of interest in the bond market are those which are deeply immersed in debts and go bankrupt very soon causing total losses to the investor.

It is suggested that those who are interested in investing through the bond markets to go through the Bond Rating before finally investing.

About EconomyWatch PRO INVESTOR

The core Content Team our economy, industry, investing and personal finance reference articles.