ExpertGlossary

• Aaa: Bonds which are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
• Aa: Bonds which are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in the Aaa securities, or fluctuation of protective elements may be of greater amplitude, or there may be other elements present that make the long-term risk appear somewhat larger than the Aaa securities.
• A: Bonds that possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment sometime in the future.
• Baa: Bonds that are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative investment characteristics as well.
• Ba: Bonds that are judged to have speculative elements; their future cannot be considered as well-assured. Often, the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
• B: Bonds that generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
• Caa, Ca, C: These ratings are regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. (Ratings definitions reprinted from Moody's Bond Record, January, 1997. Caa, Ca, C ratings definitions have been summarized.)

Moody's is a financial services company best known for rating investments. Moody's rates bonds, common stock, commercial paper, municipal short-term bonds, preferred stocks, and annuity contracts.

Its bond rating system, which assigns a grade from Aaa through C3 based on the financial condition of the issuer, has become a world standard.

• Prime-1: Issuers rated P-1 have a superior ability for repayment of senior short-term debt obligations. P-1 repayment ability will often be evidenced by many of the following characteristics:
  • Leading market position in well established industries. High rates of return on funds employed.
  • Conservative capitalization structure with moderate reliance on debt and ample asset protection.
  • Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
  • Well-established access to a range of financial markets and assured sources of alternative liquidity.
• Prime-2: Issuers rated P-2 have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained. (Only P-1, P-2 ratings definitions have been presented here. Consult Moody's Investor Service for ratings in entirety.)