Like just about every other adult, you probably have a credit score -- a rating that indicates how safe it is (or how risky it is) to lend you money. Corporations and governments borrow money, too. And they, too, have credit ratings. Moody's Investors Service, one of the major credit ratings agencies, grades corporate and municipal bonds on a scale from "Aaa," for the best of the best, to "C," for those at the bottom of the barrel.
In the Moody's system, a rating consists of one to three letters. The first letter is always capitalized and indicates the general grade of the bond: "A" bonds are the good ones, "B" bonds are of middling quality, and "C" bonds are the worst. Within each of those grades, there are three levels of quality, designated by two, one or zero lowercase letters "a." So the full Moody's credit rating scale, from best to worst, is as follows: Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C.
Within each rating between Aa and Caa, Moody's further subdivides bonds with numerical modifiers -- "1," "2" and "3" -- that indicate where a bond ranks within its rating category, with 1 being the best. A bond rating of "Aa1," for example, means that the bond is among the highest-quality bonds in the "Aa" category, just a cut below the top-quality "Aaa" bonds. A rating of "Aa3," on the other hand, means the bond is at the lower end of the "Aa" pool, close to "A" status. "Aaa" ratings don't have modifiers, nor do those below "Caa."
Investment Grade vs. Junk
Moody's designates the top four ratings -- Aaa, Aa, A and Baa -- as "investment grade." Bonds with those ratings are generally safe places to put your money. Those rated "Aaa" have almost no chance of defaulting, and the risk rises as you move down the scale. As is usually the case with investments, low risk means low return: Investment-grade bonds pay relatively low rates of interest. Bonds rated "Ba" and below are what polite people call "speculative" and what everybody else refers to as "junk bonds." Their default risk is high enough that big institutional investors and banks usually won't touch them. Way at the bottom, "Ca" bonds are usually on the brink of default, and "C" bonds are typically already in default. The farther down the scale a bond is, the more it has to pay in interest to get investors to take a chance.
Moody's vs. Other Agencies
The other major credit ratings agencies, Standard & Poor's and Fitch, structure their scales differently from Moody's ratings, although they follow a similar logic. Their systems go as follows, from best to worst: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. (The "D" rating, which has no equivalent in Moody's, is kind of like an extra circle of Hades for really awful bonds.) Instead of using numerical modifiers for the ratings from AA to CCC (the equivalent of Aa to Caa in Moody's), these scales use plus and minus signs. So a rating of "BBB+" by S&P or Fitch is equivalent to a "Baa1" from Moody's. An "AA-" from S&P or Fitch is the same as a "Aa3" from Moody's.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.