Credit rating

An agency's published opinion on the relative likelihood that a specific obligation is repaid, expressed on an ordinal scale and usually paid for by the issuer.

Example

An obligation placed at the lowest rung of investment grade sits one notch above the threshold at which many institutional mandates are no longer permitted to hold it.

Important

A rating says nothing about price, and price is the entire question - any credit is attractive at some yield and unattractive at another. It is also silent on interest-rate sensitivity, liquidity, recovery and any options in the contract.

Related terms

• Investment grade — The band of credit ratings above the threshold that separates the higher-quality tier of bonds from the speculative tier. Many institutional mandates permit holdings only within it.
• High-yield bond — A bond rated below the investment grade threshold, carrying a wider spread over government yields to compensate for a higher assessed chance of default.
• Credit spread — The difference between a bond's yield and that of a government bond of the same currency and maturity. It is the market's price for the default risk, the illiquidity and any adverse options the government bond does not carry.
• Credit risk — The risk that an issuer fails to make a contracted payment. It is the risk most associated with bonds and, for high-quality issuers, rarely the one that moves the price.

Lessons that explain it

• Appraising one bond: three yields that disagree, and what the rating leaves out — A single bond has a coupon rate, a current yield and a yield to maturity, and they are three different numbers. The gap between the last of them and a government bond is the market's own estimate of what could go wrong. (13 min)

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