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The Journal of Structured Finance

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Primary Article

Bond Rating Confusion

Mark H. Adelson
The Journal of Structured Finance Winter 2007, 12 (4) 41-48; DOI: https://doi.org/10.3905/jsf.12.4.41
Mark H. Adelson
Managing director and head of structured finance research at Nomura Securities International in New York, NY.
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  • For correspondence: madelson@us.nomura.com
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Abstract

Bond ratings are becoming confusing because rating agencies have adopted inconsistent rating definitions for different kinds of securities. Standard & Poor's rating definitions illustrate the issue most vividly. S&P's rating symbols correspond to different default probabilities for 1) corporate bonds, 2) mortgage and asset backed securities, and 3) collateralized bond obligations. At Moody's, the rating scale for U.S. municipal bonds is calibrated to different levels of expected loss than is the rating scale for all other types of bonds. Inconsistent rating definitions undermine the comparability of bonds from different sectors of the fixed income markets. Moreover, regulations that rely on private credit ratings often presume that each rating agency's rating definitions are constant across market sectors (and also constant over time). Inconsistent rating definitions contradict that presumption and cast doubt on the effectiveness of the regulations.

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The Journal of Structured Finance
Vol. 12, Issue 4
Winter 2007
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Bond Rating Confusion
Mark H. Adelson
The Journal of Structured Finance Jan 2007, 12 (4) 41-48; DOI: 10.3905/jsf.12.4.41

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Bond Rating Confusion
Mark H. Adelson
The Journal of Structured Finance Jan 2007, 12 (4) 41-48; DOI: 10.3905/jsf.12.4.41
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