Debt rating

A debt rating is a grade given by a debt rating service to a company.

The rating given is a result of an examination of the company’s financial strength. Therefore, once a company’s rating goes down, this means that there is a greater chance for it to default on its obligations. An improvement in the company’s rating translates into the opposite situation, and serves as proof of improvement in its financial health. The highest rating that can be given to a company is AAA.

Moody’s is the most popular credit rating system in the world, with S&P coming second.

On the other hand, the term bond credit rating refers to the rating given to a company’s debt issues. If a bond is rated AAA, it means that it has a very high credit quality and affords investors much protection in terms of repayment of both the principal amount and the interest. Such bonds are generally known for offering stable returns. As this is the best possible rating that can be given, it is, quite predictably, given to very few entities.

The next rating is AA, which, although a lower rating than the first, still suggests that the bonds have high credit quality. Protection of both the principal amount and interest is still considered to be high, and bonds which fall under this category are considered to be resistant even in the event of some unforeseen changes in the economy.

On the other side of the spectrum are the C and D ratings. C bonds are considered extremely speculative, while bonds which have the D rating are those which are already in default of the principal, the interest, or even both.

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