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What are the bond rating services and what do they do?

The bond rating services provide independent rating services for many debt securities such as government and corporate bonds.

These ratings help investors decide the quality of debt securities, and to challenge or confirm conclusions based on their own research and experience. In Canada, Dominion Bond Rating Service and Standard & Poor's Ratings Direct Canada, offer this service. American bond rating services include Moody's and Standard & Poor's. All of these services use a similar ranking scale, featuring letters of the alphabet, as the basis for comparing debt quality. After an extensive analysis, the bond rating agencies assign a rating which indicates whether, in their opinion, it is a high or low risk investment. The ratings are basically a judgement on the probability that investors will get uninterrupted repayment of their interest and get their principal back. The ratings classify securities from investment grade through to speculative. They relate one company's ability to meet its debt obligations to those of other companies, especially to those in the same industry.

Example:   Canadian Bond Rating Service assigns its top ranking of A++ to bonds it judges to be of the highest quality. Companies with this debt rating would have sufficient financial strength and perhaps a combination of strong earnings, quality assets and little debt. These companies would have the least likelihood of failing to repay their debt. CBRS assigns a C to speculative quality companies, those where there is no assurance that adequate coverage of interest and principal can be maintained. Companies with a D are in default, having failed, for example, to pay interest or principal back on schedule and may be in the process of being liquidated. A firm with a Suspended rating is experiencing severe financial or operating problems, and there's uncertainty over whether it will be able to pay off its debt.

Bond ratings are closely monitored by investors. A rating change -- especially a downgrading -- can cause the price of that security to fall. An upgrading of a company's bonds could see their price increase. A high rating benefits a company because that means it can borrow money at a lower interest rate on new debt issues. The rating services don't manage funds for investors, or buy and sell securities or recommend securities to buy or sell.