How do credit ratings affect returns?

The leading rating agencies rate most corporate bond issuers on their ability and willingness to pay interest and repay principal as planned. These agencies use quantitative tools and qualitative assessments to assess the creditworthiness of an issuer and have developed a rating system that gives these issuers credit ratings.
Typically, only the bonds issued by the largest and strongest companies qualify for the top investment grade ratings that indicate relative credit outstanding. The highest quality rating is Triple-A. The rating levels drop to Triple-C as a failure option and finally to D or Standard.

Bonds with a minimal probability of default are investment grade and are rated Baa3 or higher by Moody's or BBB- or higher by Standard & Poor's and Fitch ratings. Those companies rated under Baa3 or BBB- are considered “Speculative Grade”. They have a higher risk of default and are classified as high-yield bonds as some types of un-classified bonds are.

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