Understanding Bond Ratings

As we stated in the previous chapter, credit risk should be your paramount concern. One data point to consider when evaluating the credit risk of a potential municipal bond is the bond's rating.

There are 3 major rating agencies that evaluate thousands of issuers and their municipal bonds. The agencies are Standard and Poor's (S&P), Moody's, and Fitch. The ratings agencies assign ratings such as AAA and other ratings we'll discuss below. The objective of the rating agency is to assign a municipal bond a credit rating to make it faster for market participants to evaluate risk. (Think of this in terms a person's individual credit score - it makes loan decisions easier for lenders.) A credit rating performs the same service for institutional borrowers and investors. A bond's credit rating is the rating agency's opinion as to the creditworthiness of the bond's issuer.

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