Using Bond Ratings to Evaluate Investment Quality

          

         

           

         

               Evaluating investment quality is an important part

          of any investment decision.  However, with some

          investments, quality may be difficult to judge.

               For example, if you're considering a bond that has

          been issued to finance a project hundreds of miles

          away, you probably won't be able to drive by the site

          to evaluate the project.  You also might not have the

          time or expertise to investigate the issuer's financial

          stability.  You can read the offering documents and

          financial statements but may still be unable to make a

          professional judgment.

               That's where bond ratings can help.  In 1909, John

          Moody originated a system of rating securities to

          provide investors with a relatively simple way to

          evaluate investment quality.  Today, two investment

          rating services are primarily used in the securities

          industry:  Moody's and Standard & Poor's.  They are

          similar in the way they classify bonds, and they are

          the most used and respected rating services available.

               To help you understand bond ratings, let's look at

          the Moody's system.  Moody uses nine major symbols to

          rate bonds.  From highest to lowest in investment

          quality, they are Aaa, Aa, A, Baa, Ba, B, Caa, Ca and

          C.  The lower the rating, the lower the investment

          quality.  The Standard & Poor's ratings are similar.

          From highest to lowest in investment quality, they are

          AAA, AA, A, BBB, BB, B, CCC, CC, C and D.

               Some bonds may be non-rated (NR).  In some cases,

          this indicates low investment quality.  In other cases,

          bonds may be non-rated for reasons unrelated to

          quality.  For example, because issuers of tax-free and

          corporate bonds must apply for a rating and pay a fee,

          they may decide simply to not apply.  A bond may also

          be non-rated if the issue is very small, if there is a

          lack of essential data relating to the issuer or if the

          issue is privately placed with institutional investors.

               In addition, ratings are not permanent.  Many

          bonds are long-term, and circumstances affecting their

          ratings may change over time.  Issuers of previously

          rated bonds are periodically reviewed by the rating

          services.  If their financial condition changes, so may

          the bond rating.  The current rating reflects the best

          judgment of investment quality at the current time.

               Therefore, when purchasing tax-free or corporate

          bonds, it is vital to monitor ratings regularly to be

          aware of any changes in investment quality.