An assessment of the creditworthiness of an individual or company based on the value and availability of its assets relative to liabilities, as well as its history of borrowing and repayment. Credit rating agencies such as S&P, Moody’s and Fitch evaluate credit risks of issuers. They allocate a credit rating to each issuer based on its likelihood of default arising from its creditworthiness. A poor credit rating indicates that the rating agency considers the issuer to have a high risk of default based on its history and long-term economic prospects.
Credit ratings can be separated into two large categories: investment grade and high yield/speculative/junk. An investment grade rating indicates that the issuer has a relatively low risk of default. A high yield or speculative bond has a high risk of default and is usually purchased for speculative purposes, offering superior interest rates than safer bonds.