Moody’s Investors Service (along with STANDARD & POORS’S Corporation) ranks BONDS according to their DEFAULT risk. Investors want information in order to assess the RISK versus return of financial securities. Moody’s Investor Service’s widely used rating system provides investors with default risk information. In Moody’s system, corporate bonds are rated from Aaa to C, with Aaa signifying highest quality (lowest default risk) and C being the lowest grade. The full Moody’s rating scale is Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. Bond ratings are based on the firm’s expected cash flow, the firm’s other contractual cash obligations, how profitable the firm has been, and the variability of the firm’s earnings. Any corporate bond rated Baa or above is considered “investment grade” with relatively low risk of default. Any bond rated below Baa is considered a speculation and is referred to as a “junk bond” in financial markets. The distinction between investment-grade and speculativegrade bonds is important because many INVESTMENT groups (MUTUAL FUNDS, commercial banks, INSURANCE companies, and pension funds) direct their investment managers to invest only in investment-grade bonds. Companies issuing debt (that is, selling bonds) pay a rating service to get their securities rated. The charge to a company can easily be $50,000–$100,000, but the benefit can be significant. Bonds with higher ratings will be purchased by investors at lower INTEREST RATES, while bonds with lower ratings (greater potential of default) will have to pay investors a higher interest rate. While the difference in a few basis points (each basis point equals one-hundredth of one percent) may not seem significant to individual investors, to corporate financial officers charged with borrowing hundreds of millions of dollars, it is a considerable amount of money. Once Moody’s has issued a bond rating, the rating is reviewed periodically. Moody’s will sometimes issue a rating alert, signaling to investors that a company’s bonds are being reviewed for either an upgrade or downgrade. If a bond is downgraded, the bond price typically will decrease as investors demand a higher rate of return to hold riskier securities. In the 1990s many companies’ bonds were downgraded when they took on additional debt in order to acquire other companies. Some companies in poor financial condition will choose to not have their debt securities rated. In addition, companies issuing small amount of bonds will sometimes find it cheaper to issue unrated securities rather than pay the cost for having them rated. Moody’s also rates COMMERCIAL PAPER—short-term, unsecured obligations issued by banks and CORPORATIONs to meet temporary financial situations. Moody’s commercial- paper rating system ranks securities from P-1 to P-3.