Bond ratings are an essential tool when considering fixed-income investments. Ratings provide a professional assessment of credit risk, or the risk of default, which can be measured to some degree by analyzing the bond issuer's financial condition and creditworthiness.
Credit rating agencies perform this type of analysis and issue ratings that reflect the agency's assessment of the bond issuer's ability to meet the promised interest payments and return the principal upon maturity. The best-known independent rating agencies — Standard & Poor's, Moody's Investors Service, and Fitch Ratings — use similar scales in descending alphabetical order, ranging from AAA/Aaa for the most creditworthy bonds to C/D for the least creditworthy.
Bonds rated BBB/Baa or higher are considered "investment grade." They generally should be part of a diversified portfolio
A credit rating is not a recommendation to purchase a bond. Even so, higher-rated
So, what bond ratings do agencies use?
Bond rating agencies typically use similar scales, and it may be helpful to understand how to compare ratings from multiple agencies.
This chart compares bond ratings in descending order of creditworthiness (from left to right) as judged by the three best-known credit agencies.
Standard & Poor's and Fitch Ratings use the symbols + and – to denote the upper and lower ranges of ratings from AA to CCC; Moody's uses the numbers 1, 2, 3 to denote the upper, middle, and lower ranges from Aa to Caa.
Note: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. If a bond is insured (typically for lower-rated bonds), there will be two ratings, one for the bond issuer and one for the insurer. Bond insurance adds a potential layer of protection in the event that an issuer defaults, but it is only as good as the insurer's credit quality and ability to pay. An investor should not buy bonds based solely on the insurance.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
This article was prepared by Broadbridge Advisor Solutions.