Bonds & rates
Credit rating
An agency’s assessment of how likely a borrower is to repay, on a lettered scale.
How it works
Ratings run from AAA down through investment grade to BBB−, below which debt is speculative grade, commonly called high yield or junk.
The investment-grade boundary matters enormously in practice, because many institutions are prohibited from holding anything beneath it. A downgrade across that line forces selling.
Where it misleads people
Ratings are opinions, they lag events, and the agencies are paid by the issuers they rate. Structured products rated AAA before 2008 are the standing reminder.
Related terms
- Credit riskThe risk that a borrower fails to make the payments it promised.
- High-yield bondDebt rated below investment grade, paying more because default risk is materially higher.
- Investment gradeDebt rated BBB− or better, considered to have a relatively low risk of default.
- Fallen angelA bond downgraded from investment grade to high yield.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.