Moody's vs. Standard & Poor's Bond Ratings - Lesson | Study.com (2024)

FAQs

Moody's vs. Standard & Poor's Bond Ratings - Lesson | Study.com? ›

Moody's rates long-term debt using a descending scale of upper- and lowercase letters combined with numbers, ranging from Aaa to C. Standard & Poor's uses uppercase letters with occasional emphasis from plus or minus signs to evaluate bonds.

Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, as well as WR and NR for 'withdrawn' and 'not rated' respectively. Standard & Poor's and Fitch assign bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, D.

While credit rating agencies are sometimes viewed as interchangeable, Moody's, S&P and Fitch in fact rate bonds differently; for example, S&P and Fitch Ratings measure the probability that a security will default, while Moody's ratings seek to measure the expected losses in the event of a default.

What role do Moody's, Standard & Poor's, and Fitch's bond ratings play in the pricing of a bond? the riskiness of the bond. That is, these rating agencies analyze the firm's ability to make the future promised payments (potential for default) and therefore provide the appropriate default premium for pricing the bond.

In fact, a high credit rating allows the bond issuer to succeed the international issuance. And, it generates the liquidity for trading these bonds in the secondary market, which attracts more investors.

Equifax, Experian, and TransUnion are the top three credit bureaus in the U.S. They are private businesses that collect and sell data on the spending and borrowing habits of individual consumers.

Whereas S&P ratings are the agency's opinion on the likelihood or probability of default by a corporate or sovereign, Moody's ratings are based on expected losses, reflecting both on the likelihood of default and expected financial losses in the event of default (Loss Given Default).

Each agency has its own models by which they evaluate the creditworthiness of a company. Ratings directly affect the interest rate that an organization must pay to buyers of its bonds and other debt.

Aaa Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk. Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. A Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.

These are assigned by credit rating agencies such as Moody's, Standard & Poor's, and Fitch Ratings to have letter designations (such as AAA, B, CC) which represent the quality of a bond. Bond ratings below BBB/Baa are considered to be not investment grade and are colloquially called “junk bonds.”

Why is Moody's rating important? ›

As a leading global provider of credit ratings, research, and risk analysis, we offer valuable insights into the financial stability and creditworthiness of organizations, debt instruments, and securities.

Investment grade bonds are assigned “AAA” to “BBB-" ratings from Standard & Poor's and Fitch, and "Aaa" to "Baa3" ratings from Moody's. Junk bonds have lower ratings. The higher a bond's rating, the lower the interest rate it will carry, due to the lower risk, all else equal.

Moody's determines covered bond ratings using a two-step process: an expected loss analysis and a TPI framework analysis. EXPECTED LOSS: Moody's uses its Covered Bond Model (COBOL) to determine a rating based on the expected loss on the bond.

Most issuers of debt securities rated by MIS have, prior to assignment of any rating, agreed to pay MIS for rating services rendered by it. MIS's fee structures and ranges are summarized in fee schedules that are provided to issuers.

Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk. Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.

Firms can sell fewer bonds when they are highly rated. Bonds with higher ratings are less likely to have to be repaid. Higher bond ratings mean a much lower purchase price of the bond.

The scale runs from AAA to D and intermediate ratings of (+) or (-) are offered at each level between AA and CCC (for example, BBB+, BBB and BBB-). S&P may also offer guidance (referred to as a credit watch) on whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).

Long-term Issuer Credit Ratings assigned on our globally recognized 'AAA' through 'D' - rating scale. Short-term Issuer Credit Ratings assigned on our 'A-1' through 'D' rating scale.

The S&P and Fitch AAA rating is the highest that can be assigned to any issuer of debt. It's the same as the Aaa rating issued by Moody's. This rating is assigned to investment-grade debt that has a high level of creditworthiness. Debt issuers with the highest ratings have the strongest capacity to repay investors.