What You Should Know About Ratings
Bond ratings are an assessment of an issuer’s ability to repay its debt, based on its history of borrowing, repayment, and other factors. Bond ratings are issued by agencies such as Standard & Poor’s (S&P) or Moody’s and are designed to reflect an issuer’s credit quality (the ability to repay principal and interest based on history of borrowing) by assigning a letter grade to each bond. But they do not guarantee performance now or in the future. Issuers rated below investment grade are expected to have a greater risk of default, and therefore typically pay a higher rate of interest to investors for that risk. The ratings agencies assign these grades within several common categories.
Rated AAA by S&P; Aaa by Moody’s
Rated BBB or higher by S&P; Baa or higher by Moody’s
High-yield bonds (also called “sub–investment grade” or “junk” bonds)
Rated below BBB- by S&P; below Baa3 by Moody’s
Bonds in default (issuer is no longer able to make interest payments and/or pay back principal in a timely manner)
Rated DDD or lower by major rating system, S&P