Bond Credit Ratings: What a Letter Grade Does Not Tell You

A bond's credit rating is an assessment of creditworthiness: the issuer's ability to meet financial obligations. Ratings often use letter grades. Investor.gov cautions that the grade is a third party's assessment, not an evaluation issued by the SEC or the bond issuer.

What does the rating compare?

Ratings generally rank relative credit risk. A higher-rated obligation is assessed as less likely to default than a lower-rated one. Default means failing to make the required debt payments.

The meaning of a symbol depends on the agency using it. Read the agency's scale and definitions rather than treating a familiar letter as a universal explanation. Different agencies can use different methods and reach different judgments about the same issuer.

Which risks are outside the grade?

A credit rating does not cover every risk that affects a bond. The SEC names market and liquidity risks as examples. A rating also does not judge whether the purchase price is attractive or whether the bond fits your financial needs.

Even a top rating is not a repayment guarantee. Ratings can change without warning, and a high-rated instrument can default. Registration of a rating agency with the SEC is not an endorsement of its ratings.

What else should you read?

Review the bond's offering documents, financial information and the issuer's circumstances. Consider the maturity, payment terms, ability to sell and sensitivity to interest rates. Ask for an explanation of any feature you do not understand before investing.

The SEC also notes potential conflicts in how agencies are paid. Treat a rating as one input alongside your own research or professional advice, not as a replacement for either. Bonds and bond funds can lose value, including the original amount invested.

Frequently asked questions

Does a high rating guarantee I get paid? No. Investor.gov explicitly warns that even highly rated obligations can default.

Is a rating a recommendation to buy the bond? No. It assesses credit risk, not your personal suitability or the price you should pay.

Sources and further reading: Investor.gov, ABCs of Credit Ratings (https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-8).