How Is the Standard and Poor's Financial Strength Rating Calculated?


Quick Answer

Standard and Poor ratings are designed to measure the ability for a company to pay off its debt, so the ratings are based on a ratio of the company's assets to debt or liabilities, and on the resources it has to pay off its debt, explains Money Crashers. S&P focuses on the likelihood of a borrower defaulting.

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Full Answer

Standard and Poor bond ratings are intended to tell an investor how risky a bond before he makes the decision to purchase it, notes Money Crashers. This means that Standard and Poor uses a ranking system to indicate the likelihood of an investor receiving the full redemption at the redemption date, according to the terms of the bond. AAA is the highest rating, and it comes with extremely tight guidelines to ensure that Standard and Poor are only putting that level of approval on bonds with an incredibly high chance of being paid properly by the corporation. AA+, AA, and AA- are also very good bond categories.

A+, A, and A- bonds are ones that are likely to pay if conditions remain good economically, but could potentially be in trouble in changing conditions, states Money Crashers. BBB+, BBB, and BBB- are one step down from that level, still associated with companies that have demonstrated good practices and policies, but with less ability to stay strong in a changing market. Any bonds below those are speculative-grade bonds, meaning that they are likely to have a higher return to offset the lower chance of receiving the full amount. The lowest rating is D, for companies that have already defaulted.

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