Question

Describe the rating systems of Moody’s versus Standard and Poors. Why do corporations pay to have their bonds rated by these agencies? What do these ratings suggest about a corporate bond to an investor?  

Answer 1

There are 3 big ratings agencies in the U.S which are the a) Moody's b) S&P c) Fitch ratings.

the S&P while providing ratings only focus on the probability of default and not the value of loss to the investors once the issuer has failed to meet its obligations, while the MOODY'S not only focus on the probabilty of the default but also on the expected losses.

the S&P does not bring clarity that a downgrade essentially means to SELL the bonds which we are holding. The moody's on the other hand demarcate that an upgrade is essentially BUY ratings to the bonds and a downgrade is a SELL ratings.

The ratings given by the S&P are AAA,BBB,D to distinguish between the investment grade bonds and the junk bonds. moody's ratings are in the form of Aaa ,Baa,Ca to categorize the investment grade and junk bonds which represent the quality of the bond.

the corporations pay to have their bonds rated because the ratings offered by these agencies determine the ability of the issuer to pay the interest and principal payment obligations, thus representing the quality of the bonds. investors will be more than willing to invest in the investement grade bond and the yield on the bondst hat they will require will also be low due to the trust entrusted upon them as a result of the good ratings offered by the rating agencies.

a rating of AAA by the S&P or Aaa by the moody represent that the obligor has very strong capacity to meet its financial obligations.

similarly AA+,AA and AA- represent strong capacity to meet the obligations.

Aa1 ,Aa2 , Aa3 given by the Moody's represent strong capacity of the obligor to meet obligations.

a rating of BBB+,BB+,B+ given by the S&P, OR Baa1 ,Ba1, B1 represent adequate capability,less vulnerable to more vulnerable to meet the financial obligations respectively. where B+ represents more vulnerable.

CCC to D by the S&P and Caa to C by the MOODY'S represents that the obligor is highly vulnerable to the obligor has failed to pay it's financial obligations. D and C representing failed to pay the obligations.