Please ensure Javascript is enabled for purposes of website accessibility

Ask a Fool: What Do Bond Ratings Mean?

By Matthew Frankel, CFP® – May 18, 2018 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's the quick version of how bond ratings work.

Q: I'm shopping for bond investments, and see ratings like AAA, AA, and others. What do these mean?

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 lower-rated bonds considered "high-yield" or "junk" bonds.

While higher-rated bonds have lower risk of default, they also generally have lower yields. As of this writing, an 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.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.