Bond rating

A bond rating is a score indicating the probability that a bond issuer will default on repayment of a bond. Credit rating agencies examine the financial performance and financial stability of issuers in order to derive a bond rating. Each credit rating agency has a different scoring system; a sample score is AAA for an issuer that is highly unlikely to default, to a D score, where the issuer is already in default. When a bond rating is quite high, the issuer can set the interest rate lower, since investors are accepting a lower level of default risk. Bonds with a rating of BBB and above are considered investment grade, while those rated B and below are considered to be speculative. The primary credit rating agencies are Standard & Poor’s, Moody’s, and Fitch Ratings, though other firms are also recognized by the Securities and Exchange Commission as valid rating agencies.

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