Market Rating

Research has shown that bond rating systems based on recent bond pricing, using actual trade data, are more accurate than the ratings based solely on company research. Many researchers and analysts in the financial community believe, and have shown using statistical techniques, that the market price, reflected in recent bond prices, is a more accurate indicator of the current and future value of a bond.

A bond's rating should be based on the bond's risk and monetary return. That is precisely how the 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.)

Each bond's % yield, that is Yield to Maturity (YTM)*, which is its rate of return, is calculated based on its recent price, coupon payments, and maturity date. The bond's YTM is then compared to the yield of a treasury bond of equivalent maturity. The yield of the treasury should always be lower than the yield of the bond, since the treasury is considered (default) risk free. Otherwise, why should an investor buy a bond, which has a degree of risk, if the investor could buy a treasury with no risk and a higher return?

The bond yield is subtracted from the yield of the treasury of equivalent maturity, the resulting spread represents the extent to which the market perceives the bond is risky. The larger the spread the greater is the perceived risk.

Bonds are 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.


* Some bonds are subject to a call date by their issuers that is earlier than the original maturity. The yield, called the Yield to Call (YTC), is generally lower than the YTM based on the original maturity. When this occurs, the rating will be based on the lower of the two returns, called the Yield to Worst.