1. A rating is an opinion about creditworthiness
Credit-rating agencies assess the issuer or instrument’s ability to meet financial obligations according to their methodology.
Tip: Rating is about credit risk, not expected investment return.
2. Higher rating generally means lower assessed credit risk
Lower-rated bonds may offer higher yields because investors demand compensation for greater perceived default risk.
Tip: Higher yield can be payment for higher risk.
3. Ratings can change
Issuer finances, industry conditions or other information can lead to upgrades or downgrades. A rating is not permanent.
Note: Do not treat a rating as a guarantee.
4. Rating is only one part of bond analysis
Also examine maturity, liquidity, security/collateral, covenants, issuer financials and whether the bond suits the goal.
Tip: A good rating does not eliminate interest-rate risk.
5. Quick check
A bond has a high credit rating. What does that guarantee?
Answer: B - Ratings are opinions about creditworthiness, not guarantees.