May 2010 demonstrated that rating changes can have a

May (2010) demonstrated that rating changes can
have
a 鸣 nificant
impact on the bond' s price and the time the rating
a 句 ustment
is announced.
The original ratings assigned to bonds have an impact on their marketability and effective
yield. Generally
,
the three agencies' ratings agree in their assessments. When they do not
,
the
issue is said to have a split rating.
3
Seasoned issues are regularly reviewed to ensure that
3S
plit ra
tin gs are discussed in Billingsley
,
Lamy
,
Marr
,
and Thompson (1 985) and Li u and Moore (1 987). Studies th at
consider shopping for ratings , the acquisiti on of indicative ratings , and ra tin gs bias are Mathis , McAndrews , and
Rochet (2009) and Skreta and Veldkamp (2009).

High grade
Medium gra de
Sp eculative
Default
Chapter
12:
Bond Fundament al s and Valuation
429
the assigned rating is still valid. If it is not , rev i sio ns are made either upwar d or downward.
Revisions are usually done in increments of one r ating grade. The ratings are based on both
the company and th e issue.
A 丘 e r
an ev al uat i on of the creditwor t hiness of the to tal company is
comp l eted , a company ra t ing is assi gne d
t o 由 e
f rrm ' s most senior unsecured issue.
Al
l junior
bonds receive lower ratings b ased on inden tu re specifìcations.
Al
so , an issue could rece i ve a
hig h er rating because of credit -en h ancement devices , such as the attachment of b ank letters of
credit , surety , or indemnifìcation provisio ns
丘 om
insu r ance companies-
The agencies ass i gn lette r r atings depic t ing what they view as the risk of default of an obli-
gatio n . The l etter ratings range from AAA (Aaa) to
D.
E 对 üb i t
12 .3 describes th e var i ous ratings
assign ed by the majo r se rvi ces. Except for sli ght varia t ions in designations , t he meaning and
i nterp ret ation are basically the same. The agencies
modi 命 the
r atings with + and - signs for
F it ch and
S&P
or with numbers
(1
-2 - 3) f or Moody 's. As an examp le , an A+ (A1) bond is at
the top of th e A - rated group , while
A 一 (A3)
is at th e bottom of the A category.
Fitch
AAA
AA
A
BBB
BB
B
CCC
CC
C
DD D
,
DD
,
D
Moody's
Aaa
Aa
A
Baa
Ba
B
Caa
Ca
C
Standard &
Poor's
AAA
AA
A
B BB
BB
B
CCC
CC
C
D
Definition
The hi ghest rating ass i gned to a debt inst ru ment
,
indicating an extreme ly st rong capacity to pay principal
and int eres
t.
B onds in this cat egory are often referred
to as
gilt-edge securities.
High-quality bo n ds by a ll stan dar ds wi th a strong capacity
to pay principal and int eres
t.
Th ese bonds are rated
l ower pr i ma rily b ecause the margins of prot ect i on are
no t as strong as th ose for Aaa and AAA bonds .
Th ese bonds possess ma ny favorab le i nvestment
attr i butes
,
but elements may su ggest a su scepti b il ity to
i mpai r me nt give n adve r se eco n omic cha n ges.
Bo n ds that are r egarded as having adequate capa ci ty to pay
pr incipal and int erest
,
but they do not have ce rt ain pro-
tective el eme n ts
,
in the eve nt of adve r se economic cond i-
tions th at could lead to a weake n ed capacity f or paymen t.