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Bond Ratings
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

Measures or yardsticks of investment quality, i.e., of BUSINESS RISK and FINANCIAL RISK present in bonds.  The principal rating agencies publishing ratings on bonds are Moody's (a subsidiary of Dun & Bradstreet, the latter itself specializing in municipal bond ratings) and Standard & Poor's (a subsidiary of McGraw Hill, Inc).

Corporate Bond Ratings.  

Standard & Poor's Corporation, Moody's Investors Service, and Fitch Publishing Company provide quality ratings for corporate bonds, expressed in alphabetical letter grades, ranging from the highest quality designation to successively lower levels of investment quality down to speculative and in default.  Bond ratings are value judgments as to possibility of default and encompass comprehensive analyses of earning power and financial condition.  Although banks, in the Investment Securities Regulation of the Comptroller of the Currency, are no longer to be primarily reliant upon such bond ratings, nevertheless by analogy the four highest ratings are considered to indicate bonds eligible for investment by banks.

U.S. Government bonds are not rated, but are considered as a yardstick against which to measure all other issues.  Beyond figures on the company's probable future earning power, its financial resources, its property protection (encumbrance of property by other debt), and the bond's indenture provisions, data for ratings are supplemented by managerial facts obtained from top management (e.g., product planning, research goals, expansion plans, etc.).

Municipal Bond Analysis.  

Revenue bonds of municipalities, which are not full faith and credit obligations and depend for debt service upon profitability of the facilities involved, are akin to corporate obligations in their dependence upon revenue trends, operating ratios, and earnings coverages of debt service.  Although it is still conventional in analysis of general obligations to compute quantitative ratios, rating of municipal bonds is even more of an art than rating of corporate obligations.  Quantitative ratios such as net debt to full assessed valuation, net debt per capita, and debt service percentage of operating budget have decreased in relevancy in recent years, especially for the larger municipalities, for the following reasons:  (1) the changed composition of sources of revenues the property tax decreasing in importance while reliance upon federal and state grants-in-aid has been increasing proportionately; (2) the changed composition of urban population, dramatized by the flight to the suburbs of the middle class and the proportionate rise in lower-income and welfare groups placing more strain upon municipal social services and aid; and (3) the operating budgets that provide for such social services and aid rising faster than the debt service, so that this ratio has actually declined in many instances.  Instead, qualitative factors have assumed increased importance, such as trends and structural diversification of business and industry, and internal versus external sources of revenues and their relative stability.  Overall, the quality of the municipality's administration in facing the numerous social and economic problems is crucial.

BIBLIOGRAPHY

Corporate Bond Ratings:  An Overview.  Standard & Poor's Corporation, New York , NY .  Periodic updates.  


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