In 1909 John Moody devised a system for rating corporate debt securities according to their relative investment merit, and in 1919 the ratings were applied to municipal bonds. This rating system continues today in essentially the same form. The purpose of the ratings is to provide investors with a simple system of gradation by which varying degrees of risk might be observed. Gradations of investment quality are indicated by rating symbols, each symbol representing a group in which the quality characteristics are broadly the same. It is not claimed that two bonds with the same rating are of precisely the same quality but only that the two are in the same general range on the quality spectrum. On the other hand, one can view the ratings as indicating an order of preference for bonds where factors other than quality are the same. There are nine rating symbols, ranging from the symbol denoting the poorest investment quality and the most risk (C) to the symbol denoting the highest investment quality and the least risk (Aaa). The first four rating symbols, Aaa, Aa, A, and Baa cover those bonds in which investment quality predominates; lower rated bonds have predominantly speculative characteristics. Institutional investors for the most part confine their investments to the four highest grades of bonds and banking regulatory authorities use bond ratings when examining the condition of banks. Neither market appreciation nor market depreciation in a bank's bond portfolio is taken into account in figuring net sound capital for I securities. Group I securities are marketable obligations in which the investment characteristics are not distinctly or predominantly speculative. This group includes general market obligations in the four highest grades and unrated securities of equivalent value. 1 Although bond ratings are not the only basis of determining investment quality when examining a bank's bond portfolio, in practice, bond ratings become very important measures. Moody's lists several qualifications to the use of bond ratings. One is that, since ratings are designed exclusively for the purpose of grading bonds according to their investment qualities, they should not be used alone as a basis for investment decisions. For instance, they have no value in forecasting price changes. Secondly, the ratings themselves are not to be construed as a recommendation with respect to attractiveness. The attractiveness of a given bond may also depend upon its yield, its maturity date, and other factors.2 Thirdly, Moody's municipal ratings become more meaningful when viewed in the perspective of a given bond's current and future market value, instead of the more prevalent practice of measuring a bond's quality in terms of its likelihood to default.3 (Since the Second World War there have been nearly 120,000 DAVID L. HOFFLAND, C.F.A., is a Vice President and the Director of Bank Investments for the Southern California First National Bank. He is the past president of the Financial Analysts Society of San Diego. 1. Footnotes appear at end of article.