Moody bond ratings are used to help assess the risk of investing in a bond. A bond is established by what is called the "issuer" and that issuer must pay an interest rate that will be attractive to investors. The higher the interest rate, the more attractive it is because that means a higher return for the investor.
To find the best bonds, Moody bond ratings uses letters and digits that rate the quality of a bond. The higher the rating, the better the quality of that bond. For instance, a rating of Aaa is the highest and signifies that a bond is of the best quality. This rating also signifies a small amount of risk.
Aside from the rating of Aaa, there are a number of other ratings in the Moody bond Ratings system. You can use these ratings to determine which bonds are going to give you the best yield outcomes over their duration measure.
The next rating, the Aa, is placed on those bonds that are of a high quality. The reasons why these bonds are not Aaa bonds is because there may be some fluctuation that comes into play or the risk may be somewhat higher.
The third is the A rating. These bonds are considered "favorable" and the interest that the bonds yield are considered "reasonable." There are some elements that may suggest that the bond is of a higher risk compared to the high quality bonds.
The next series of ratings begins with Baa. This rating is reserved for medium-grade bonds. They sit in limbo because they are not using the best protective measures, but they are not secured poorly either. There may be some characteristics that are considered not outstanding, posing risk to the investor in addition to the lower yields.
The rest of the B series of ratings continues like the A series. You have Ba, B, and then you move into the C series, starting with Caa. Those bonds with the ratings Caa, Ca, and C are considered poor bond investments. Obviously, C is the poorest of all relevant stocks. The prospects of a bond rated with a C are very poor and the bond really has no prominent standing to be a secure investment unless it improves over time. Most investors, however, decide not to take the risk unless there is some underlying potential that has not been wholly identified.
A rating of C is not the lowest rating possible however. That is the lowest rating that can be obtained on "relevant" bonds. The lowest rating is the D. The D rating is placed on bonds that are more or less not very relevant to the investment scenario because the issuer has failed to pay their principal or interest.
The Moody Bond Ratings may also have digits behind them. If you see a digit after a letter rating, such as Aa2, these indicate certain sub-levels that contain relevant facts regarding the bonds. If you have an Aaa1, then you have the highest possible rating a bond can receive. If you have an Aaa3, you still have one of the highest ratings. The number 1 signifies that a bond has great sub-facts, while the numbers 2 and 3 indicate that there may be a slight variation somewhere in the facts that indicate there may be a slight bit of risk or a small negative factor.
So if you are looking to invest in bonds, you now know what ratings to look for so that you can make an investment that meets your particular degree of risk and helps you obtain the yield that you deserve.
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