How Tax-Free Municipal Bonds Are Rated

How Tax-Free Municipal Bonds Are Rated

Municipal bonds frequently referred to as tax-free bonds, pay a flat rate of interest and are tax-free in the United States. The municipalities that issue the bonds promise that investors will get their designated interest income as well as the initial principal when the bonds mature. The guarantee’s strength is determined by the financial condition of the municipality offering the bond. Moody’s, Standard & Poor’s, and Fitch provide a credit score to each tax-free bond primarily on the issuing municipality’s financial data and the possibility of defaulting.

Bonds with High-Level Tax Ratings

Moody’s gives the highest-quality tax-free bonds an Aaa rating, while Standard & Poor’s and Fitch give them a AAA rating. These cities have the best financial standing and are the least likely to fail on their debts. Moody assigns an Aa1 rating to high-quality bonds, whereas Standard & Poor’s and Fitch provide an AA+ rating. These cities do not have the same financial strength as their highest-rated counterparts. Moody rates bonds with diminished creditworthiness as Aa2, whereas Standard & Poor’s and Fitch rate them as AA. Moody’s gives the lowest high-grade bonds an Aa3 rating, while Standard & Poor’s and Fitch give them an AA- rating.

Bond Ratings in the Upper Medium Range

Although upper medium-grade tax-free bonds are still rated attractive to investors, the producing municipalities are in a worse financial position than high-grade bond issuers. The interest rate rises in tandem with the bond’s probability of insolvency. Moody’s rates upper-medium bonds at A1, A2, and A3, whereas Standard & Poor’s and Fitch rate them at A+, A, and A-.

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Bond Ratings of a Medium-Grade

If financial fundamentals stay stable, municipalities that issue medium-grade bonds ought to be able to satisfy their commitments. The best ratings in this class are bonds ranked Baa1 by Moody’s and BBB+ by Standard & Poors and Fitch. Moody’s rates medium-grade municipal bonds at Baa2 and Baa3, while Standard & Poor’s and Fitch rank them at BBB and BBB-.

Bonds with Low Medium-grade Scores

Low-medium bonds have credit scores that are well beneath standard and the possibility that the issuing municipalities will have problems meeting their responsibilities on schedule is pretty high. The bonds have a higher interest rate than bonds with a higher credit rating. These bonds are rated Ba1, Ba2, and Ba3 by Moody’s, BB+, BB, and BB- by Standard & Poor’s and Fitch, respectively.

Ratings for Low-Grade Bonds

Municipalities holding low-grade bonds are at risk of failing to meet their financial stake or capital repayments commitments. Bonds rated Caa by Moody’s, CCC by Standard & Poor’s and Fitch, and Caa by Moody’s are susceptible to late or missed obligations. Bonds with a Ca rating from Moody’s and a CC rating from Standard & Poor’s and Fitch are particularly vulnerable to late or missed payments. Bonds with a C rating from Standard & Poor’s and Fitch are at risk.

Ratings for Default Bonds

Bonds with ratings of C from Moody’s and D from Standard & Poor’s and Fitch have defaulted on their payments. Such municipalities could be on the brink of declaring bankruptcy or have already done so. Bond investors would be extremely fortunate if they obtain any of their original principal investments returned at this time.

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Oladotun Olayemi

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