Definition
Credit ratings are assigned by agencies (S&P, Moody's, Fitch) and range from AAA (highest quality) to D (default). Investment grade (BBB-/Baa3 and above) and high yield (below BBB-/Baa3) is the critical dividing line—many institutional investors are restricted to investment-grade only. Rating changes significantly impact bond prices and borrowing costs.
lightbulb Example
A company rated BBB is downgraded to BB+ (fallen angel). Credit spread widens from 180 bps to 400 bps overnight. Forced selling by investment-grade-only funds creates additional price pressure.
verified_user Key Points
- AAA through BBB- = investment grade
- BB+ through D = high yield (speculative)
- Downgrades can trigger forced selling
- Split ratings occur when agencies disagree