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Credit Rating
An assessment of the creditworthiness of a bond issuer, assigned by rating agencies.
Credit Rating
Credit ratings evaluate the likelihood that a bond issuer will meet its debt obligations—essentially, the risk of default.
Major rating agencies
- S&P Global Ratings: AAA to D scale
- Moody's: Aaa to C scale
- Fitch Ratings: AAA to D scale
Rating scale
- Investment grade: BBB−/Baa3 and above (lower risk, lower yield)
- High yield (junk): BB+/Ba1 and below (higher risk, higher yield)
- Default: D or C rating (issuer has failed to pay)
Impact on investors
- Higher-rated bonds offer lower yields (less risk compensation needed)
- Lower-rated bonds must offer higher yields to attract buyers
- Rating downgrades cause bond prices to fall
- Many institutional investors can only hold investment-grade bonds
Limitations
- Ratings are backward-looking and can lag reality
- The 2008 financial crisis exposed failures in the rating process
- Ratings should be one input, not the sole basis for investment decisions
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Fixed Income
Difficulty
Beginner
Reading Time
1 min
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Where You'll See This
This concept appears throughout stock detail pages and financial data.