BB- — S&P / Fitch
Ba3 — Moody’s
The BB-/Ba3 rating is given to bonds and companies who have a moderate risk of default, and this rating appears around the middle of a scale with over 20 ratings.
There are two symbols in this example which are the same rating: Fitch and S&P use BB-, and Moody’s uses Ba3. These are the Big Three of the Credit Ratings Agencies (CRAs) that the SEC has sanctioned to issue ratings which can be used for internal regulation within industry groups.
It is notable, however, that some of the importance of the CRAs was undercut by changes in the SEC rules concerning them after the crash of 2008, since it was believed that there was too much weight placed on the opinion of the ratings institutions, especially when they may have conflicts of interest in their business model, in which they take large payments for giving ratings to companies.
But we digress — the spectrum of ratings, despite some cynicism and instances where the system failed investors, is built upon empirical data for the default rates, recovery rates, and other quantifications of company stability and bond security. Within a reasonable degree of error, the ratings will give investors a fairly accurate picture of the risks involved in a bond issue or a company, municipality, or insurer.
The investors who are willing to take on the greater risk of non-investment grade bonds, which are known as high yield bonds and junk bonds, can be rewarded with higher yield payouts. This higher payout for higher risk is known as a risk premium, similar to the extra interest charged by banks to individuals with low credit scores.
Ratings might be given to bonds, companies, insurers, and municipalities, among other entities, and the ratings of one don’t necessarily determine the other: a company with a particular rating can issue a bond with another rating.
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