Bond ratings

Definition

Bond ratings are evaluations of the creditworthiness of a corporation's or government's debt issues. These ratings are provided by agencies and reflect the risk of default associated with the bond.

5 Must Know Facts For Your Next Test

1. Major rating agencies include Moody's, Standard & Poor's (S&P), and Fitch Ratings.
2. Bonds rated BBB- (S&P) or Baa3 (Moody's) and above are considered investment-grade, while those below are classified as junk bonds.
3. A higher bond rating typically results in lower interest rates for the issuer due to perceived lower risk.
4. Bond ratings can change over time based on an issuer's financial health and economic conditions.
5. Investors use bond ratings to assess the risk-return profile of different bonds before making investment decisions.

Review Questions

• What is the difference between investment-grade bonds and junk bonds in terms of bond ratings?
• How do changes in bond ratings affect a company's borrowing costs?
• Name three major agencies that provide bond ratings.

Related terms

Default Risk: The possibility that a bond issuer will be unable to make scheduled interest or principal payments.

Interest Rate Risk: The risk that changes in market interest rates will affect the value of a bond.

Yield Spread: The difference in yields between two bonds with differing credit qualities, often used as an indicator of credit risk.