Credit Ratings and Default Risk
The biggest risk in a bond, besides interest rates, is that the borrower does not pay you back. Credit ratings summarize that risk. Here is how the scale works and how yields rise with risk.
The rating scale
| Rating (S&P style) | Category | Meaning |
|---|---|---|
| AAA, AA | Investment grade | Very strong ability to pay |
| A | Investment grade | Strong, but more sensitive to bad times |
| BBB | Investment grade | Adequate; BBB− is the lowest investment grade |
| BB, B | High yield (“junk”) | Speculative; more likely to default |
| CCC and below | High yield | Real risk of default |
| D | Default | Payments missed |
Moody’s uses a similar scale with different letters (Aaa, Aa, Baa and so on).
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