Understanding bond credit ratings

If you own or have considered purchasing bonds, you've probably seen bond credit ratings: usually a short series of letters, or letters and numbers (e.g., AAA or Ba3), that appear after the name of a bond. Bond credit ratings provide an assessment of a bond issuer's ability to pay its financial obligations.

It's important to know that several organizations (credit rating agencies) issue these ratings, and there are no standard or agreed-upon methods to measure a rating's accuracy. Each agency may use its own scales, definitions, methodologies and factors to formulate its own subjective opinions and ratings, and may even provide multiple ratings for an individual bond. 

For example, some ratings may only reflect the bond issuer's creditworthiness, while others may consider factors such as bond insurance, credit enhancement features or legal certifications. Credit rating agencies may differ in the time horizon that their ratings address. Some agencies' ratings only reflect the likelihood that an issuer will default, while other agencies also consider the expected loss that may result from a default. Additionally, credit rating agencies may change their scales, definitions or methodologies at any time, potentially resulting in significant rating downgrades or upgrades. 

Potential conflicts of interest

You should be aware that some credit rating agencies may be paid by the issuers they rate or by other entities obligated to make bond payments if needed.  This creates a potential conflict of interest, since these credit rating agencies may be influenced to grant more favorable ratings than warranted to retain these issuers and entities as clients and obtain new clients. Alternatively, some credit rating agencies may be paid by subscribers to their services, whose desire for low or high credit ratings, depending on their holding and trading positions, may also present a conflict of interest.  You should understand the information that credit ratings are intended to convey and any limitations to the ratings.

Edward Jones statements and Online Access

Edward Jones displays certain bond ratings supplied by Standard & Poor's (S&P), Moody's Ratings and Fitch Ratings on your account statement(s) (if you've customized them to show additional asset details) and in your Online Access. The bond ratings shown on client statements are the highest of several possible credit ratings assigned by S&P, Moody's or Fitch for a particular bond and may reflect factors in addition to the credit quality of the issuer, such as bond insurance or participation in a credit enhancement program.

You may find specific information about these credit rating agencies' definitions, methodologies and factors used to formulate their opinions on their websites or by contacting them directly:

• Standard & Poor's
• Moody's
• Fitch Ratings

Additionally, ratings for individual municipal bonds may be found on the MSRB's EMMA website and for corporate bonds on the FINRA Fixed Income Data website.

Additional information

Please see the following websites for additional information on bond credit ratings:

• The ABCs of Credit Ratings
• SEC Office of Credit Ratings
• SEC Investor Bulletin: Municipal Bonds: Understanding Credit Risk (PDF)
• Understanding Credit Ratings
• Credit Rating Basics for Municipal Bonds on EMMA^® (PDF)