Credit Risk

A bond issuer's ability to pay its debts (make all interest and principal payments in full and on schedule) is a key concern for investors. Most corporate bonds are evaluated for credit quality by Standard & Poor's, Moody's Investors Service and Fitch Ratings.

Bonds rated BBB or higher by Standard & Poor's and Fitch Ratings, and Baa or higher by Moody's, are widely considered "investment grade". Bonds rated BB (S&P and Fitch) or Ba (Moody's) or below are speculative investments - often called high yield bonds. These lower rated bonds typically pay higher interest rates than investment grade bonds to compensate for the extra risk.

Credit Ratings

MOODY'S¹	STANDARD & POOR'S²	FITCH RATINGS³

Aaa Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.	AAA Extremely strong capacity to meet financial commitments. Highest Rating.	AAA Highest credit quality; the lowest expectation of default risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.	AA Very strong capacity to meet financial commitments.	AA Very high credit quality; expectation of very low default risk.
A Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.	A Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.	A High credit quality; expectation of low default risk.
Baa Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.	BBB Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.	BBB Good credit quality; expectation of default risk are currently low.

MOODY'S¹	STANDARD & POOR'S²	FITCH RATINGS³

Ba Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.	BBB- Considered lowest investment grade by market participants.	BB Speculative; indicates an elevated vulnerability to default risk.
B Obligations rated B are considered speculative and are subject to high credit risk.	BB+ Considered highest speculative grade by market participants.	B Highly speculative; indicates that material deffault risk is present, but a limited margin of safety remains.
Caa Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.	BB Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial, and economic conditions.	CCC Substantial credit risk. Default is a real possibility.
Ca Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.	B More vulnerable to adverse business, financial, and economics conditions but currently has the capacity to meet financial commitments.	CC Very high levels of credit risk. Default of some kind appears probable.
C Oblications rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.	CCC Currently vulnerable and dependent on favorable business, financial, and economic conditions to meet financial commitments.	C Exceptionally hgih levels of credit risk. Default is imminent or inevitable, or the issuer is in standstill.
	CC Currently highly vulnerable.	RD Restricted Default
	C Currently highly vulnerable obligations and other defined circumstances.	D Default.
	D Payment default on financial commitments.

¹ Source: Moody's. Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa.

² Source: Standard & Poor's. Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

³ Source: Fitch Ratings. The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories.

Event Risk

Another potential exposure in owning corporate bonds is "event risk". Corporations are subject to supply and demand factors for their products, business cycles, restructurings, and/or recapitalizations which can seriously impact the value of an issuer's outstanding bonds. Any sudden increase in a company's debt load or inability to tap the new issue bond markets can push bond values down - occasionally resulting in sharply lower valuations. All bonds are subject to this potential risk.

Risk Considerations

Incapital.com Login

Register Now

Credit Risk

Credit Risk

Credit Ratings

Investment Grade

Non-Investment Grade

Event Risk

Risk Considerations