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?
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.
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