Credit rating (bonds)
Also called Bond rating
A letter grade from a rating agency that estimates how likely a bond issuer is to make its interest and principal payments on time.
What it means
The major rating agencies grade governments, companies and individual bond issues on lettered scales that run from AAA (or Aaa) at the top down through AA, A and BBB, then BB, B and lower, ending at D or C for issuers in or near default. Pluses, minuses or numbers mark finer steps within each letter.
Bonds rated BBB−/Baa3 or above are called investment grade. Those below are high yield, often called junk bonds: they pay higher interest to compensate for a greater chance of default. Ratings are opinions, not guarantees; they can be raised or lowered, and a downgrade usually pushes a bond’s price down and its yield up. This bond rating is different from a personal credit score.
Example
Suppose two 10-year corporate bonds are available: an A-rated bond yielding 4% and a BB-rated bond yielding 6%. On $10,000, that is $400 versus $600 a year, and the extra $200 is pay for taking on more default risk.
How it’s used
- Assessing the default risk of a bond or bond fund
- Comparing yields across bonds of different quality
- Reading a fund’s breakdown of holdings by rating
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.