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Moody’s

Standard & Poor’s

Ratings’ Meanings

Aaa

AAA

Highest quality

Aa

AA

High quality

A

A

High-medium quality

Baa

BBB

Medium quality

Ba

BB

Below investment grade

B

B

Low quality

Caa

CCC

Very risky

Ca

CC

Highly speculative

C

C

Lowest quality

D

D

In default

CHAPTER 7

110

Table 7.1

Bond Ratings

Corporate Bonds These are bonds issued by private companies that are usually based on how financially sound the issuing company is. They are viewed as less secure than both U.S. government issues and most municipal bonds. Corporations issue bonds for many reasons, but the most common one is to raise capital. By issuing bonds, the firm is borrowing money from the bond’s investors. The corpora- tion will then use the money raised to finance different ventures, all the while making interest payments to its bond holders. Then, at maturity, the company will pay the bond holders their original investment.

Some corporate bonds are secured by a claim on all or a portion of the physical property of the issuing company. Examples of these are mortgage bonds and equipment trust certificates. Most corporate bonds, though, aren’t guaranteed in this manner, but rather, they are backed by the full credit of the company with no specific lien on the company’s property. These are called “debentures,” and they gener- ally have first claim on all the company’s assets once all specifically pledged property has been distributed. Subordinated debentures have a claim on assets once all older debt is taken care of. These bond issues may also have what is called a sinking-fund provision. These

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