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Definition: Credit Quality
Also known as Bond Rating, this is one of the key aspect that is looked at for gauging the investment quality of an investment, be it bond or mutual fund is Credit Quality or Creditworthiness. It is a signal to the investors of a bond of the worthiness of the borrower and also highlights the risk of default. Private and independent rating agencies such as Moody’s, Standard & Poor’s, and Fitch, determine the credit quality of a bond.
The designations range from high, to medium to low. These are donated differently by different agencies but the usual representation is AAA, BBB, CCC for high, medium and low ratings.
Investors who are interested in the safety of their bond investments should stick to high investment grade bonds because there’s surety of receiving the coupon payments and finally the principal amount at maturity. For investors who are willing to accept a higher level of risk, they could consider lower credit-quality bonds. The advantages of these are that they provide high interest rates compared to an AAA rated bond. The investor is rewarded for taking the risk of default.
The following table highlights the various possible credit ratings.