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Bond Valuation


The borrower's credit rating is an important factor in connection with bond investments.

Companies such as Standard & Poor's, Moody's Investor Services and Fitch analyse and classify the creditworthiness of bond issuers. Among other things, they examine the issuer's ability to meet the terms and conditions of the bond (interest payments and redemption) and what kind of collateral there is for the investor in the event of bankruptcy.

The ratings do not constitute recommendations to buy or sell and they do not indicate the market conformity of the terms and conditions of the bond.

Standard & Poor's Moody's Rating definition
AAAAaa Regarded as the highest quality rating that can be awarded to an issue. Interest payments and redemption of the principal on maturity are assured to the maximum possible degree.

AAAa The issuer's ability to make interest payments and repay the principal is assured to a very high degree. The difference in quality between AAA and AA is considered minimal.

AA The issuer's ability to make interest payments and repay the principal is assured to a very high degree. However, it should be noted that these debt issues may be adversely affected by political and economic events.

BBBBaa Regarded as the lowest investment grade. Companies which have been awarded this rating have sufficient financial capacity to service interest and principal payments, but they are more dependent on economic developments than the above categories when it comes to timely servicing of the debt. Issues with BB, B, CCC, CC and C ratings are of a speculative nature.
Securities in categories Baa and lower are all classed as speculative by Moody's.

BBBa Debt issues assigned this rating are sensitive to the current business fortunes of the company.
Interest payments and repayment of the principal on maturity are assured, provided the course of business remains stable.

BB Interest payments and repayment of the principal on debt issues with this rating currently are currently assured. Companies ranked B are regarded as extremely vulnerable to finding themselves no longer able to meet these obligations in the event of their business taking a turn for the worse.

CCCCaa CCC-rated debt instruments are dependent on the business of the company going well if the interest and principal are to be serviced in a timely manner. A drop-off in business results would make it unlikely that these obligations could be met.

CCCa As a rule, this rating is assigned to subordinated debt of CCC-rated issuers.
The ability of the issuer to repay the principal is the same as in the case of a CCC rating.

CC This rating is normally used in cases of debt restructuring. Interest payments are still being made, but it is considered unlikely that the principal will be repaid.

D Distressed debt issues. This rating is assigned in the case of a debt restructuring moratorium. It is assumed that it will not be possible either to make interest payments or to repay the principal.

+, -1, 2, 3 Standard & Poor's often annotates bonds in the categories AA through B with a plus (+) or minus (-) sign.
This notches the relative quality of an issue within a given category up or down.
Moody's sometimes annotates bonds in the categories Aa through B with a number between 1 and 3.
1 indicates that the given issue is qualitatively better than the average for the category; 2 indicates medium quality; 3 is used for bonds that only just meet the quality criteria for the category.


Bonds of lower quality, i.e. less than a triple-B rating (BB down to C), are referred to as "junk bonds" due to the increased risk and correspondingly higher yield.