A Bond Credit Rating is a measure of the quality and safety of a bond (note or any security of indebtedness) by a credit rating agency, based on the issuer’s financial condition. These ratings determine the interest that an issuer must pay to attract purchasers to the bonds. The ratings are expressed as a series of letters and digits. Generally, a higher credit rating would lead to a more favorable effect on the marketability of a bond. Typically, AAA is highest (best), and D is lowest (worst). Anything below triple B is commonly known as a “junk bond”.
- Bonds rated “AAA†– Bonds that are rated “AAA†are judged to be of the best quality. These are the highest ratings that can be assigned by rating agencies. The investment risks for these bonds are quite low, meaning they’re safe investments. The bond issuer’s ability to pay interest and principal is extremely strong.
- Bonds rated “AA†- Bonds that are rated “AA†are considered to be of high quality by all standards. The difference between the highest rated (AAA) bonds and this is quite small. They are rated lower than the best bonds because margins of protection may not be as large as the “AAA†bonds.
- Bonds rated “A†– These types of Bonds have strong capacity to pay interest and repay principal. They’re considered to be upper medium grade bonds. However, they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories.
- Bonds rated “BBB†– These types of Bonds rated are considered to be of lower medium grade. They are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or unreliable over any length of time. These bonds lack outstanding important characteristics and have speculative characteristics as well.
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