Bond Rating Table

BOND RATINGS

This table illustrates ratings of the two principal bond rating agencies, Standard & Poors and Moody's. Third agency, Fitch, may be listed in some of the literature that you may read.

QUALITY	S&P	Moody's	Description
High Grade	AAA	Aaa	Bonds judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large, stable margin. Principal is secure.
	AA	Aa	Bonds that are judged to be of high quality by all standards. They are rated lower than the best bonds because margins of protection may not be as large. AAA and AA bonds are referred to as "High Grade."
Medium Grade	A	A	Upper-medium grade obligations. Factors giving security to principal and interest are considered adequate.
Bottom rung of Investment Grade Bonds	BBB	Baa	Bonds that are considered as medium-grade obligations -- they are neither highly protected or poorly secured.
Speculative Grade	BB	Ba	Bonds that have speculative elements. Protection of principal and interest may be moderate.
	B	B	Bonds that lack the characteristics of a desirable investment. There may be small assurance of principal and interest payments over any long period.
Default	CCC	Caa	Bonds of poor standing. These issues may be in default or there may be elements of danger present with respect to principal and interest.
	CC	Ca	Obligations speculative to a high degree. These issues are often in default.
		C	Lowest rated class in Moody's list.
	C		Rating given to income bonds on which interest is not being paid.
	D		Issues in arrears in interest and/or principal payments.

Default Rates on US Bonds

Studies are periodically done on bond defaults. To illustrate the risk of investing in lower grade bonds, this study tracked default rates up to 10 years after issuance. You can see that bonds rated single B had a 40% default rate 10 years into their term.

Yrs after issuance	AAA	AA	A	BBB	BB	B	CCC
1	0%	0%	0%	.03%	0%	.87%	1.31%
2	0	0	.30	.57	.93	3.22	4.00
3	0	1.11	.60	.85	1.36	9.41	19.72
4	0	1.42	.65	1.34	3.98	16.37	36.67
5	0	1.70	.65	1.54	5.93	20.87	38.08
6	.14	1.70	.73	1.81	7.38	26.48	40.58
7	.19	1.91	.87	2.70	10.91	29.62	NA
8	.19	1.93	.94	2.83	10.91	31.74	NA
9	.19	2.01	1.28	2.99	10.91	39.38	NA
10	.19	2.11	1.28	3.85	13.86	40.86	NA

Source: Edward Altman "Defaults and Returns on High-Yield Bonds through the First Half of 1991" Financial Analysts Journal, 47, no 6 (November/December 1991): Table X, pp 74-75

LINKS TO BOND RATING AGENCY WEBSITES