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Municipal Bond - Market Implied Ratings

Market Implied Rating

Summary:

Computed based on the bond's return, or yield, relative to the yield of a treasury bond of equivalent maturity. A treasury bond, which is backed by the U.S. government, is viewed as having no risk. So the larger the spread (difference) between a bond's yield and its equivalent treasury yield, the more default risk the market perceives for that bond. Another way of saying this is that the market is requiring a higher yield to compensate for the higher default risk. Bonds rated from five stars (best) to none. Bonds with lower spreads (less risk) are given more stars than bonds with higher spreads (more risk). Ratings are calculated frequently to ensure they reflect the most current market factors.


The following graphic describes the different credit ratings. These descriptions are relative and do not imply recommendations for specific bonds for individual investors.


Market Rating Explanation
Treasury Bonds Considered risk free. Backed by the full faith and credit of the U.S. Government
5 Stars Best quality and stable borrowers.
4 Stars Also high quality borrowers, with slightly more risk than 5 star borrowers.
3 Stars More sensitive to changes in the economy that can affect price and yield.
2 Stars Increasing economic volatility can lead to even wider swings in price and yield.
1 Star Borrowers are vulnerable to changes in the economy which can impact ability to meet commitments.
0 Stars Very vulnerable to changes in the economy and considered speculative.

Legend

Black - Bond has a yield in the top tiers of its Equivalency Class. Other factors being equal, you should consider this bond for potential investment.
Red - Bond has a yield in the lowest tiers of its Equivalency Class. Other factors being equal, you should consider choosing other bonds with higher yield (ie, higher star rating).


More Information:

Research has shown that bond ratings based on recent bond pricing, using actual trade data, are more accurate than the ratings based solely on company research.

A bond’s rating should be based on the bond’s risk and monetary return. That is precisely how the BondView Market Implied Rating is calculated. In this case, the risk is related to the risk of default by the issuer, not interest rate risk, which is dealt with by duration.

The number of stars assigned to a bond is related to the default risk, which is the risk that a bond issuer will not meet its obligation to make a coupon payment or repay the principal. The more stars assigned the lower (better) is the default risk. This is computed based on the bond's return, or yield, relative to the yield of a treasury bond of equivalent maturity. A treasury bond, which is backed by the U.S. government, is viewed as having no risk. So the larger the spread (difference) between a bond's yield and its equivalent treasury yield, the more default risk the market perceives for that bond. Another way of saying this is that the market is requiring a higher yield to compensate for the higher default risk.

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