What do bond ratings mean?

They give investors look at risk/reward profile

Question: I’m shopping for bond investments and see ratings such as AAA, AA and others. What do these mean?

Answer: There are three main bond rating agencies: Standard & Poor’s, Fitch and Moody’s. The first two use similar ratings, with AAA being the best, followed by AA, A, BBB, BB, B, CCC, CC, C and D with +/- used to further break down the ratings. Moody’s ratings start with Aaa, then go to Aa, A, Baa, Ba, B, Caa, Ca and C and instead of pluses and minuses use the numbers 1, 2 and 3, in descending order, to break it down further.

These ratings are used to convey a particular bond’s risk/reward profile to investors.

Typically, the lowest rating means that a bond is already in default. Any bond rated BBB-/Baa3 or higher is considered “investment grade,” with lowerrated bonds considered “high-yield” or “junk” bonds.

While higher-rated bonds have a lower risk of default, they also generally have lower yields. As of this writing, a AA-rated corporate bond with a 10-year maturity yields 3.86%, while a slightly lower-rated A-rated bond of the same maturity yields 4.01%.

If you have a low risk tolerance, bond ratings can help you find bonds with virtually no chance of default. On the other hand, if you have the appetite for a little more risk, these ratings can help you construct a fixed-income portfolio with an appropriate amount of risk for you.