Bond Ratings and How They Work

Introduction

Three main ratings agencies evaluate the creditworthiness of bonds: Standard & Poor’s (S&P), Moody’s Investors Service (Moody’s), and Fitch. These agencies use similar ratings systems to assess a bond’s creditworthiness. The ratings of bonds are solely the opinion of the agency and do not guarantee the credit quality or likelihood of default. Bonds rated above a certain level are considered “investment grade”, and lower graded, or non-investment grade bonds are considered “high yield” or “junk” bonds. Bonds with lower ratings generally offer higher yields to entice and compensate investors for taking on additional risk. The lower the bond is rated, the higher the risk the investor is taking.

Bond Rating Breakdown

See below for a breakdown of bond ratings for each ratings agency:

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Rating agencies will upgrade or downgrade a bond’s rating based on the financial health of the issuer. Investors should monitor a bond’s rating regularly, as it can affect the sale price if the bond is sold before it reaches maturity. It is important to note that a bond’s rating is not indicative of performance now or in the future.

The Bottom Line

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