May (2010) demonstrated that rating changes can have a鸣nificantimpact on the bond' s price and the time the rating a句ustmentis 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 3Split ratings are discussed in Billingsley, Lamy, Marr, and Thompson (1985) and Liu and Moore (1987). Studies that consider shopping for ratings, the acquisition of indicative ratings, and ratings bias are Mathis, McAndrews, and Rochet (2009) and Skreta and Veldkamp (2009).
High grade Medium grade Speculative Default Chapter 12: Bond Fundamentals and Valuation 429 the assigned rating is still valid. If it is not, revisions are made either upward or downward. Revisions are usually done in increments of one rating grade. The ratings are based on both the company and the issue. A丘eran evaluation of the creditworthiness of the total company is completed, a company rating is assigned to由efrrm' s most senior unsecured issue. All junior bonds receive lower ratings based on indenture specifìcations. Also, an issue could receive a higher rating because of credit -enhancement devices, such as the attachment of bank letters of credit, surety, or indemnifìcation provisions 丘ominsurance companies-The agencies assign letter ratings depicting what they view as the risk of default of an obli-gation . The letter ratings range from AAA (Aaa) to D. E对übit12.3 describes the various ratings assigned by the major services. Except for slight variations in designations, the meaning and interpretation are basically the same. The agencies modi命theratings with + and -signs for Fitch and S&P or with numbers (1-2-3) for Moody's. As an example, an A+ (A1) bond is at the top of the A -rated group, while A一(A3)is at the bottom of the A category. Fitch AAA AA A BBB BB B CCC CC C DDD, DD, D Moody's Aaa Aa A Baa Ba B Caa Ca C Standard & Poor's AAA AA A BBB BB B CCC CC C D Definition The highest rating assigned to a debt instrument, indicating an extremely strong capacity to pay principal and interest. Bonds in this category are often referred to as gilt-edge securities. High-quality bonds by all standards with a strong capacity to pay principal and interest. These bonds are rated lower primarily because the margins of protection are not as strong as those for Aaa and AAA bonds. These bonds possess many favorable investment attributes, but elements may suggest a susceptibility to impairment given adverse economic changes. Bonds that are regarded as having adequate capacity to pay principal and interest, but they do not have certain pro-tective elements, in the event of adverse economic condi-tions that could lead to a weakened capacity for payment.