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What are bond ratings?

POSTED ON SEPTEMBER 17, 2021    

A bond’s rating allows you to understand how creditworthy it is. It basically gives a result according to how likely you are to receive all coupons and be paid in full upon the bond’s maturity, while also considering how the bond could perform in the future.

 

These ratings are given by credit rating agencies, which look at many things during the process. These include the bond issuer’s financials and previous bond performance. Such agencies may be based in the Philippines or have a regional or global presence.

 

Such agencies can also rate bond issuers using these metrics, as well as their standing in their respective industry relative to their competition.

 

What are the typical ratings?

While there is no standard for the presentation of bond ratings, most credit rating agencies follow a letter format.

 

In this, AAA is the highest rating that a bond can get. It means that there is minimal risk that you won’t get repaid or receive your coupons. Bonds with this rating are usually from the government, or large and well-established companies that have a good history of repaying debt.

 

AA bonds have very low risk and issued by entities that have a very strong capacity to meet their financial obligations. Bonds with an A rating, on the other hand, are usually from similar entities but are a little more likely to be affected by changes in economic conditions than AA bonds.

 

BAA, BA, B, CAA, CA and C are other typical ratings that bonds can receive, in ascending order of default risk.

Why does a bond's rating matter?

The rating is something you should look at when you’re thinking of putting your money in a certain bond issue. It will give you an idea of how likely you are to receive the coupons according to schedule, and your principal upon maturity.

 

One thing to note is that usually the higher the rating, the lower the interest rate of the coupons. This is because of the default risk you would face by investing in those bonds.

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