Bonds with triple-A ratings are considered the safest investments available, and C and D ratings are considered the worst and are generally in default. As you scan down the chart, credit quality decreases and risk increases. Debt rated below BBB- will pay a higher rate of interest to the bondholder, but will also come with a much greater risk of default.
How are bond ratings determined?
Rating agencies undertake extensive due diligence on an issuer (a company issuing bonds) before determining a rating. They review, analyze, and compile data from the issuer's financial statements and then issue a rating based on financial ratios and other nonfinancial information.
When calculating a score, rating agencies might also consider relationships with local government agencies or a parent corporation, as well as broader economic conditions at the time of bond issuance. A bond's rating can be a quick and useful way to gauge a company's general ability to repay its bondholders.
Changes to a company's underlying fundamentals -- or a swift change in macroeconomic conditions -- can cause unusual financial outcomes. Still, overall, rating agencies try to keep the investing public informed about the financial health of any issuing company.
