HOW DEFAULT RISK IS MEASURED: BOND RATINGS

Fortunately for bond investors, there are rating firms that analyze the default risks of bond issuers and then publish their ratings.  These ratings save investors valuable time and help them to pick the bonds that meet their tolerance for risk.  The two most prominent firms that rate bonds are Moody's and Standard & Poor's.  Bonds of the highest quality receive a rating of Aaa (Moody's) or AAA (Standard & Poor's).  The following chart shows bond ratings for Moody's and Standard & Poor's:

BOND RATINGS Moody's Standard & Poor's Best quality Aaa AAA High quality Aa AA Upper-medium grade A A Medium grade Baa BBB Bonds with these ratings are called "junk bonds," "speculative," or "high-yield."  They are risky bonds with a relatively high chance of default. Ba BB B B Caa CCC Ca CC Bond is currently in default - D

The highest-rated bonds are at the top of this chart.  As you go down the chart, each listing represents bonds with greater default risk.  The greater the default risk, the lower the bond rating.   

There is one final piece of the puzzle.  Now that you know what bond ratings are and how they are used, you need to learn how to interpret those ratings to make investment decisions that meet your criteria.