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Many states, cities, and counties issue municipal bonds. These municipalities issue debt to pay for capital projects and to fund general operations. For some taxpayers, interest earned on municipal bonds may be tax exempt. Bonds are rated based on their ability to repay principal and interest payments on time. Understanding a bond’s rating helps an investor evaluate the risk of buying a bond.
Defining investment and non-investment grade ratings, default rate/safety record
Investment Grade Bond Ratings
|Moody’s||Standard & Poor’s||Comments||Default Rate*||Safety Record|
|Aaa||AAA||Gilt edge. Highest quality, very little risk.||0.00%||100%|
|Aa||AA||Very high quality. The ratings in this category include: (Moody Aa1, Aa2, Aa3) (S&P AA+, AA, AA-)||0.00%||100%|
|A||A||Good quality with a strong capacity to meet debt service
requirements. The ratings in this category include:
(Moody’s A1, A2, A3) (S&P A+, A, A-)
|Baa||BBB||Adequate quality, needs to be monitored, lowest investment
grade ratings, may not be appropriate for many portfolios.
(Moody’s Baa1, Baa2, Baa3) (S&P BBB+, BBB, BBB-)
|Ba||BB||Judged to have speculative elements. The protection of interest and principal payments may be very moderate.||1.66%||98.34%|
|B||B||Speculative; currently have the capacity to meet debt service
payments but lack characteristics of a quality investment.
|Caa||CCC||Very speculative; vulnerable to default “Buyer Beware.” Any adverse business, financial, or economic condition could result in a default.||NA||NA|
|Ca||CC||Pure junk; widely speculative, may be headed for default.||NA||NA|
|C||C||Default, bankruptcy, or reorganization seems inevitable.||NA||NA|
|D**||Bonds in default; interest or principal payments have not been made on the date due.||NA||NA|
*As per Moody’s, default rate based on the following four-year period after the Moody’s rating was assigned.
** Bonds rated as non-investment grade are not suitable for all investors. Careful consideration should be given to individual investment objectives prior to any transaction in non-investment grade securities.