Credit Rating
A graded assessment by agencies like Moody's, S&P, and Fitch of an issuer's ability to repay debt — the standardized scale for default risk.
A credit rating is an opinion issued by a rating agency on the creditworthiness of a borrower or a specific bond. The big three — Moody's, S&P, and Fitch — assign letter grades that map default risk onto a standardized ladder. S&P and Fitch run from AAA down through BBB- (the investment-grade floor) into BB+ and below (high-yield/junk), to D for default; Moody's uses Aaa to C.
Ratings drive real money flows. Many institutions are mandated to hold only investment-grade paper, so a downgrade across the BBB-/Baa3 line — creating a "fallen angel" — can force mechanical selling and sharp spread widening. Higher ratings mean lower borrowing costs; a downgrade raises an issuer's cost of capital immediately.
The practical caveat: ratings are lagging and were badly wrong on structured products in 2008, so traders treat them as a baseline rather than gospel and watch market-based signals — credit spreads and CDS — for faster, forward-looking reads on credit deterioration.
Related Terms
Corporate Bond
Debt issued by a company to raise capital, paying a coupon above Treasuries to compensate investors for credit risk.
BeginnerCredit Default Swap (CDS)
A derivative that pays out if a borrower defaults — effectively insurance on a bond, with its premium acting as a live market price of credit risk.
AdvancedCredit Spread
The yield difference between a corporate (or other non-government) bond and a Treasury of the same maturity — the market's price for credit risk.
IntermediateDefault Risk
The probability that a bond issuer will fail to make scheduled interest or principal payments — the core credit risk in fixed income.
IntermediateHigh-Yield Bond
Bonds rated below investment grade (BB+/Ba1 or lower) — offering higher yields to compensate for elevated default risk.
IntermediateInvestment Grade
Bonds rated BBB-/Baa3 or above by major rating agencies — considered low enough default risk for institutional investors and pension funds.
IntermediateMunicipal Bond
Debt issued by U.S. states and local governments, whose interest is typically exempt from federal (and sometimes state) income tax.
Intermediate