Fixed Income Securities (Bonds): Bond Ratings

A bond rating is a way to measure the creditworthiness of a bond, the ability of the issuer to pay interest and principal to the bondholder, which corresponds to the cost of borrowing for an issuer. These ratings typically assign a letter grade to bonds that indicates their credit quality.

There are three major independent bond rating services:

• Standard & Poor's
• Fitch Rating Services
• Moody's Investor Services

Ratings services assign ratings on a letter grade from one to three letters, from AAA (triple A), the highest, to D. A security with a rating of BB or lower is considered to be speculative and a risky investment; these are also known as junk bonds. In general, the higher a bond's rating, the lower its interest rate.