Credit rating

A credit rating is a credit rating agency’s opinion of the likelihood that an issuer will meet its debt obligations — coupons and principal — in full and on time. Long-term ratings run from the highest-safety grade, AAA, through AA, A and BBB and below, to D for default. Instruments rated BBB− or higher are commonly called investment grade.

Why it matters

Ratings give a standard starting point for judging credit risk. They influence the interest an issuer must offer, which bonds a debt fund may hold, and how bond prices react to news. A downgrade can push a bond’s price down sharply even before any payment is missed.

How to read it

• Ratings apply to a specific instrument or issuer at a point in time; they can be upgraded, downgraded or placed on watch.
• Notches matter. AA+ and AA− are both in the AA band but sit at different points on the scale.
• Short-term instruments such as commercial paper use a separate scale, with A1+ at the top.
• Ratings reflect structure as well as the issuer: whether a bond is secured or unsecured, senior or subordinated.

Common misconceptions

• “AAA means no risk.” It means the agency sees the lowest credit risk. It does not remove interest rate risk, liquidity risk or the chance of a downgrade.
• “Same rating, higher yield — free return.” Bonds with the same rating can still differ in liquidity, structure and outlook, and the market often prices those differences into yield.

In India: Credit rating agencies are registered with and regulated by SEBI, and publish the rationale behind each rating on their websites. Reading the rationale tells you more than the letter grade alone.