Updated on March 11, 2023
Bonds are debt instruments through which a firm raises funds and fulfils its capital requirements. These are issued at a Face value, have a maturity date, a coupon rate and come with credit quality or rating. The credit quality is assigned by external agencies called credit rating agencies, which evaluate the bond on the company’s debt paying capability, in addition to other parameters. Based on the risk, the rating agencies rate or ‘grade’ the companies and their bonds as ‘Investment grade’ or ‘non-investment’ grade. Thus a bond rating is an evaluation of a bond by a specific ‘rating’ agency engaged in this activity, based on the company’s financial health. This ensures its investors of timely interest payments as well as guaranteed principal repayment.
What should investors know about Bond rating?
Key features of Bond rating are:
1. Bonds are assigned ratings in a particular format. For example, ‘AAA’ to ‘BBB-’ or ‘Aaa’ to ‘Baa3’ to ‘investment grade’ bonds. Non-investment grade bonds (junk bonds) have ratings ranging from ‘BB+’ to ‘D’ (Default) or ‘Baa1’ to ‘C’.
2. CRISIL, ICRA, CARE, Fitch India are some of the primary rating agencies in India providing bond rating services. These agencies provide rating or ‘score’ to corporate (or government) bonds.
3. Bond rating is done after analyzing and researching the companies on various factors like financial stability, performance, cash flows and growth outlook along with other factors to check their credit worthiness.