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Moody's vs. Standard & Poor's Bond Ratings

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  • 0:03 What Is a Bond?
  • 0:40 Bond Rating Systems
  • 3:06 Rating Scale
  • 3:51 Lesson Summary
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Lesson Transcript
Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

Moody's and Standard & Poor's are bond rating organizations that evaluate the credit worthiness of individual corporate and government bonds. This lesson will familiarize you with the basics of their bond rating systems.

What Is a Bond?

James is an investor who is responsible for buying bonds for his church's investment portfolio. A bond is an investment instrument that is essentially an IOU. The government or organization issuing the bond agrees to pay the bond owner interest at a certain interval, along with the principal of the original loan at the maturity date. But how can James know that the bond issuer will actually deliver on its promise to repay the loan? Let's take a look at the two major bond rating organizations and see how the rating systems help investors like James.

Bond Rating Systems

Moody's and Standard & Poor's are the two largest bond ratings firms in the United States. They each have their own rating system to evaluate the credit worthiness of a bond's issuer. An easy to way for James to picture this concept is to think of his personal credit score. His individual FICO score is similar in principle to the Moody or Standard & Poor's ratings assigned to business- and government-issued bonds - it tells potential lenders how likely he is to pay them back. For investment purposes, it's most common to use the long-term rating scale, which is the ratings for investments with a duration greater than 1 year.

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. The systems can be used side by side by an individual to effectively evaluate bonds, but the formatting makes it easy to tell which company provided the rating. For example, since S&P doesn't use numbers in its format, a bond rating of Aa2 automatically lets us know that it's a Moody's rating.

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