CREDIT RATING AGENCIES
Just as analysts help rate stocks for potential stock investors, credit rating agencies rate bonds for potential bond investors. With these ratings, credit rating agencies provide information to investors on the likelihood of a company making its required payments of interest and principal. As bonds are essentially long- term loans, bond investors want to know whether the firm will be around for the ten or more years the bonds are outstanding.
The safety level of a bond is very important to those who choose fixed income investments. The best return a bondholder can receive is both interest payments during the term of the bond and the principal upon maturity of the bond. Therefore bondholders focus on safety. How do you know if a firm’s debt is safe or risky? Most corporate bonds are given a safety rating by at least one of the credit rating agencies. The rating process involves the company conducting a credit analysis and giving the bond a grade which informs in
vestors about the risk of a bond.