Bond Rating

A bond rating is like a credit score for bonds. Rating agencies assess the bond issuer's financial health and assign a grade that tells investors how likely they are to get their money back. Higher ratings mean lower risk — and lower interest rates.

The big three rating agencies — Moody's, S&P, and Fitch — use letter grades. S&P's scale runs from AAA (safest, like US Treasury bonds) down to D (default). Anything BBB- or above is "investment grade." Below that is "junk" or "high-yield" — riskier but offering higher returns.

Bond ratings move markets. When S&P downgraded US debt from AAA to AA+ in 2011, it sent shockwaves through global markets. A one-notch downgrade for a corporation can increase borrowing costs by millions of dollars. Banks hold massive bond portfolios, so rating changes directly impact their balance sheets.