Can a municipal bond have a higher rating then the insurer backing it? I thought I read in the CFA materials that the answer to this question is no. However, I just came across some municipal bonds that in reality have a higher rating then the insurers backing them. Any thoughts?
Nevermind I figured it out.
what did you figure out?
I found a bond rated AA when the bond insurer is S&P rated A-. Fitch and Moody’s both have the insurer rated AA; therefore, the portfolio can illistrate a AA rating. However, if only two rating agencies followed the bond insurer, say S&P and Moody’s, and they each gave the bond a different rating, say A- and AA, then the portfolio would have to go with the more conservative of the two, “A-.”
TreasExmnr Wrote: ------------------------------------------------------- > I found a bond rated AA when the bond insurer is > S&P rated A-. Fitch and Moody’s both have the > insurer rated AA; therefore, the portfolio can > illistrate a AA rating. > > However, if only two rating agencies followed the > bond insurer, say S&P and Moody’s, and they each > gave the bond a different rating, say A- and AA, > then the portfolio would have to go with the more > conservative of the two, “A-.” that is not true. if there is a split rating the portfolio does not have to go with the more conservative rating, in fact the portfolio will account for the asset as the highest rating for prospectus and collateral purposes. example, if puerto rico appropriation bonds are rated Baa/BB+, the holdings are still considered investment grade. also, if a monoline insurer was rated A (such as ACA Insurance) then downgraded to CCC (which happened), all ACA insured bonds that were rated would then be accounted for as the underlying rating (i.e. BBB)
I should have specified, I was refering to a bank’s investment portfolio. What I previously wrote is true for bank’s. 12 CFR 1
are you saying? that bank regulations require the most conservative rating to be used? i find that hard to believe, but wouldn’t rule it out. banks have to do very dumb things, especially with munis