Credit Rating
An agency's assessment of an issuer's likelihood of default.
What is Credit Rating?
Moody's, S&P, and Fitch grade issuers on a scale from AAA down. BBB-/Baa3 and above is investment grade; below that is high yield, or junk. Ratings drive borrowing costs and which bonds institutions are permitted to hold.
Credit Rating: a worked example
A downgrade from BBB- to BB+ forces some institutional holders to sell regardless of price.
More terms in Securities & Instruments
Common Stock
An ownership share in a company, with voting rights and last claim on assets.
Preferred Stock
Equity with a fixed dividend and priority over common, usually without votes.
Bond
A loan to an issuer that pays interest and returns principal at maturity.
Coupon Rate
The bond's stated annual interest as a percentage of par.
Yield to Maturity (YTM)
The total annualized return if you buy today and hold to maturity.
Par Value (Face Value)
The principal repaid at maturity, conventionally $1,000 per bond.
Duration
A bond's price sensitivity to a 1% change in interest rates.
High-Yield (Junk) Bond
A below-investment-grade bond paying more to compensate for default risk.