What do bond ratings assess?

Bond ratings primarily assess the credit quality of a bond, which refers to the issuer's ability to meet its debt obligations (i.e., make interest payments and repay the principal at maturity). This credit quality is critical for investors as it helps them evaluate the risk associated with a bond investment. Higher-rated bonds typically indicate a lower risk of default, while lower-rated bonds suggest a higher risk.

Bond rating agencies, such as Moody's, S&P, and Fitch, use various financial metrics and qualitative factors to determine these ratings, which range from investment-grade ratings (indicating lower risk) to non-investment-grade (or junk) ratings (indicating higher risk). Understanding credit quality is essential for investors when making decisions about which bonds to purchase as part of their investment portfolios.

In contrast, the market price of bonds fluctuates due to interest rate changes and market demand, the duration of bonds refers to their sensitivity to interest rate changes rather than credit quality, and the investor's return on investment is dependent on various factors, including the bond’s coupon rate and market movements, but does not directly reflect the rating itself.