What Is a Bond Rating?

What Is a Bond Rating?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A bond rating is a grade given to a bond indicating its credit quality. Private independent rating services such as Standard & Poor’s, Moody’s and Fitch provide these evaluations of a bond issuer’s financial strength, or its ability to pay a bond’s principal and interest in a timely fashion.

Related Questions

1. Who uses bond ratings?

Bond ratings are primarily used by investors when deciding which bonds to invest in. They also play a crucial role in determining the interest rate of the bonds issued by a corporation or government.

2. What does a high bond rating signify?

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A high bond rating signifies that the credit rating agency perceives a very low risk of default. Highly rated bonds are perceived as being more secure investments.

3. How is the bond rating determined?

Bond ratings are determined by the financial situation of the issuer. This includes factors such as the issuer’s income, assets and liabilities, operational efficiency, economic outlook, and past debt repayment performance.

4. What is a junk bond?

A junk bond is a term used to describe bonds with a rating of ‘BB’ or lower. These bonds have a higher risk of default; however, they also offer higher yields to make them appealing to investors.

5. Can a bond’s rating change?

Yes, a bond’s rating can change. If the bond rating agency perceives a change in the issuer’s ability to meet its financial obligations, the rating may be upgraded or downgraded.