Understanding Credit Ratings

When you buy bonds, you're taking a risk that borrowers with poor credit ratings may not repay their loans on time, if at all. Two major services, Moody's and Standard & Poor's, rate the creditworthiness of bonds. Ratings are based primarily on the credit history and current financial status of the issuer.

The ratings use a letter system. Bonds with only an A in their rating are of high quality. Bonds with a B in the rating are of medium quality (except for Moody's B rating, which is below medium quality). Bonds with a C are either low quality or extremely low quality.

Bonds are commonly labeled either "investment grade" or "high yield" quality (often called "junk" instead). The less creditworthy the borrower is, the higher your risk is of not being repaid what you lent. For that reason, higher risk bonds usually provide a higher interest rate.

You can avoid the issue of creditworthiness entirely by investing in bonds issued by the federal government and its agencies.

AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.

The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.

While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is an investment adviser and a subsidiary of AARP.