Municipal Bond Forum

Bond ratings

Q

Assuming an unrated municipal bond has the equivalent credit quality of, say a BBB rated municipal bond, what is the typical or average increase in basis points for being unrated, also assuming same maturity?

P.K. Colorado

A

James A. Klotz responds:

Although bond ratings can be helpful in providing general guidelines to investors, they are not the last word in determining how a bond will be valued in the marketplace. Assuming all other factors are equal (coupon, maturity, location, etc), all BBB bonds will not necessarily trade similarly.

Certain non-rated bonds can command a higher price than rated bonds based on market participants’ perception of underlying credit quality.

There are also instances when issuers chose not to apply for a rating to avoid the fees charged by the rating agencies.

Jun 10, 2005

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