Graduation ceremonies are over and a new freshman class is only weeks away from orientation. As another campus metamorphosis begins, student classes are clear evidence of a university's realization that building enrollments and promoting graduation rates are only a small measure of their success.

Their true test is how well they can impress Wall Street. Often the least visible sign of a university's image and academic strength, its bond rating is as much a part of the university as its fight song, school colors and alma mater. More than anything, it is the most telling sign of an institution's financial muscle.

Although more firms are getting involved in the rating process, the ratings that count the most are issued by Moody's Investors Service Inc., Standard & Poor's and Duff & Phelps. Their reports are the most respected. When they evaluate an institution, investment bankers and investors pay strict attention.

Ranging from an excellent AAA to a less-than-investment grade level BBB-, these ratings can significantly affect the cost, value and yield of the general obligation and revenue bonds an institution issues to build that new library, fieldhouse or other capital project. Generally speaking, the higher the rating, the lower the interest universities will have to pay to borrow money through bond issues.

Monitoring Investments

Traded in $1,000 and $5,000 denominations college bonds, like other tax-free municipal bonds, are long-term investments that allow individual and institutional investors to diversify and hedge their portfolios. They pay a guaranteed fixed interest rate 10 to 20 years in the future, investors like them because they are stable investments that offer the same performance rates, despite changes in the economy.

As low-risk debt instruments, higher education bonds are considered relatively safe investments, Wall Street analysts say. Historically, colleges have rarely defaulted. But as more universities are beginning to invest portions of their own portfolios in highly risky investments called derivatives, Wall Street and the Financial Accounting Standards Board, are taking steps to monitor those investments more closely.