The Evolving Meaning Of Moody’s Bond Ratings
Product Of The Symbols And Definitions Standing Committee
In 1909, John Moody introduced a simple grading system for railroad bonds that summarized
multidimensional features of credit quality – financial strength, default frequency, loss severity, and
transition risk. As his ratings were applied to other bond market segments, the relative emphasis on the
different aspects of credit quality varied to meet the expectations of investors in these different markets.
While investors historically welcomed – and, in fact, demanded – market specific definitions of credit
quality, the value placed on these distinctions by the capital markets has been diminishing as the historical
segmentation of bond markets erodes. For the past two decades, Moody’s has taken steps to achieve
greater comparability across markets by increasingly emphasizing the expected loss rate – the product of
the expected default rate and loss severity – as the primary measure of credit quality. However, in response
to the needs of investors who are highly sensitive to default and transition risk, Moody’s will continue to
overweight those aspects of credit risk in certain sectors.