Credit ratings for bonds are similar to an individual's credit score. The higher the bond rating, the more confidence the rating agency has that the issuer will be able to make all payments; the lower the bond's credit rating, the less confidence the rating agency has that the issuer will be able to make payments, and the more likely they believe the issuer may default. Just like with your credit score that can change based on whether you are paying down debt, increasing debt, making late payments, etc., periodically, the rating agencies may change a bond's rating up or down based on things that are going on that may impact the bond. Typically speaking, the higher a bond's credit rating, the lower the interest rate will be compared to the same type of bond with a lower credit rating. Sort of like someone with a higher credit score will generally qualify for lower interest rates than someone with a lower credit score. Hope that helps some.
Credit ratings give
prospective bond buyers a basis for comparing one bond with another and an assessment
of which bond issuers may be most likely to default. Ratings are assigned based
on the bond issuer’s financial strength, business conditions (corporate bonds), municipal
issues (municipal bonds), risks on the horizon, and so on. The three primary
bond credit rating agencies are Moody’s, Standard & Poor’s, and Fitch.
Wikipedia provides more information and a good summary on
what each of the “letter ratings” means: Bond Credit Rating.
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