What is a Bond Rating?

Bond ratings are understood to be a means of measuring the safety associated with a bond, as well as the overall quality of the bond issue itself. There are several factors that are involved in calculating a reliable bond rating, with most of the considerations focused on aspects of the institution that is issuing the bond offering.

The central consideration in determining the bond rating has to do with the financial condition and reputation of the debt issuer of the bonds. Simply put, the issuer has to be able to present a reasonable ability to be able to honor the terms and conditions that govern the issuance of the bonds. Demonstrating this degree of financial competence helps to ensure that that any investor that chooses to purchase one or more bonds from the issue can reasonably expect the return of both the initial investment and any accumulated interest that is extended as part of the purchase. Along with demonstrating the ability to eventually honor the terms of the bond issue, the bond rating process will also consider the ability of the issuer to meet the original schedule of interest payments, as well as the schedule for repaying the principle investment.

The investor is not left to investigate and arrive at a bond rating with no outside assistance. There are a number of competent ratings service organizations that routinely provide a breakdown of relevant factors that can impact the bond rating process. After evaluating each factor that is involved in arriving at the bond rating, the service generally uses a simple grading system to provide a simple final score on the viability of in vesting in the bond issue. Most services use a grading system that ranges from AAA as an indicator of the highest rating possible, to a score of D, which represents the least desirable of bond issues.

Researching the bond rating is always an excellent decision for the potential investor. While it is important to make note of the ratings issued by several different services, it is usually a good idea to dig a little deeper and consider the individual factors that led to the bond rating assigned by a particular rating service. Investigating several different sources for the bond rating will help the investor to make a more informed decision about whether to purchase the bond, or look for a different investment opportunity.