How
are bonds rated?
How
do you know if an issuer is likely or not likely to default
in paying back your principal or in delivering the agreed periodic
coupon payments? There are rating agencies, independent of the
corporations issuing the bonds, that analyse the credit risk
of bonds and provide a rating scale for the benefit of investors.
Two
rating agencies operate in Malaysia, namely Rating Agency
Malaysia Bhd (RAM), which was established in 1990 and the
Malaysian Rating Corporation Bhd (MARC), established in 1996.
Both are privately owned and independent organisations. Institutions
and investment fund managers use credit ratings provided by
such independent agencies in gauging the credit worthiness
of bonds.
Credit
rating is an objective and impartial third-party opinion on
the ability and willingness of an issuer of a bond to make
full and timely payments of principal and interest over the
life of the bond. The rating is given in the form of standard
rating symbols, and is designed to rank, within a consistent
framework, the degree of the default risk of a particular
bond relative to others in the market. The rating ranges from
the highest grade (an AAA according to the RAM rating) given
to the best credit risk, down to C which is the lowest grade
before actual default.
In
terms of RAM's rating, investors have come to regard securities
rated at AAA to BBB to be investment grade, and those rated
BBB and below to be speculative grade. Bonds rated C carry
a very high risk of default while those rated D are already
in default.
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