Income concepts and terms
Credit Ratings
A letter grade published by a rating agency estimating how likely a borrower is to pay — an opinion with regulatory force, not a measurement.
Credit ratings are published opinions from nationally recognised statistical rating organisations — principally Moody's, S&P Global Ratings and Fitch — about the likelihood that an issuer or a specific bond will pay in full and on time. They run from AAA or Aaa at the top, down through the investment-grade range to BBB− or Baa3, below which a bond is high yield, and on into default categories. The grade is usually paid for by the issuer being rated, is an ordinal ranking rather than a probability, and functions as a hard eligibility threshold across much of the institutional market.
Reference
The labels above place this income type before you read a word. The first is the mechanism — how the money actually reaches you, whether by lending it out, owning a slice of something, renting an asset, licensing a right, selling an option or owning a business somebody else runs. The second says whether the income keeps arriving on its own once it is running, or whether it needs work from you to keep coming. Both are descriptions of how the thing is built, not verdicts on it.
What a rating is
A rating is a published opinion about creditworthiness: the relative likelihood that a borrower meets its obligations in full and on time. The agencies that issue them state explicitly that a rating is not a recommendation to buy or sell and not a view on whether a bond's price is fair. It is a statement about the odds of getting paid, not about whether the payment is worth what you gave up for it.
Ratings are ordinal rather than cardinal. AA ranks above A, but the agencies do not claim that the gap between the two grades equals any fixed number of percentage points of default probability. The scales tell you order, not distance.
An issuer rating covers the entity as a whole; an issue rating covers one specific security and reflects that security's seniority and collateral. A single company can therefore carry several different grades at once — a stronger one on its senior secured debt, a weaker one on its subordinated notes. Moody's long-term ratings blend default probability with expected recovery into a single expected-loss opinion, while S&P's are aimed primarily at default probability itself, which is one reason the two scales are not perfectly interchangeable.
All three major agencies are registered with the SEC as nationally recognised statistical rating organisations, and that status is what gives their opinions regulatory weight. Each rating also carries an outlook — positive, stable or negative, over roughly a one- to two-year horizon — and can be placed on review or CreditWatch when a change is actively under consideration.
The scales, letter by letter
Investment grade runs AAA, AA, A, BBB at S&P and Fitch, and Aaa, Aa, A, Baa at Moody's. Speculative grade, commonly called high yield, continues BB, B, CCC, CC, C at S&P and Fitch, and Ba, B, Caa, Ca, C at Moody's. Each broad band is refined with notches: plus and minus signs at S&P and Fitch, numeric modifiers 1, 2 and 3 at Moody's, with 1 the strongest of the three. Baa1 sits above Baa3, and BBB+ sits above BBB−.
The investment-grade boundary falls between BBB−/Baa3 and BB+/Ba1. Nothing about the issuing company changes the instant it crosses that line — but a great deal changes about who is allowed to hold the bond afterward, since many institutional mandates are written directly against that letter grade.
D at S&P and Fitch, and C at Moody's, denote default or near-certain default. A separate marker, SD, denotes a selective default, in which some obligations are missed while others continue to be paid on schedule. Short-term scales run in parallel and are shorter: A-1, A-2, A-3 at S&P and P-1, P-2, P-3 at Moody's, used mainly for commercial paper and to determine money-market fund eligibility.
Structured finance reuses the same letters, but for a tranche of a securitisation rather than for a company. A structured AAA is a modelling exercise resting on assumptions about default correlation among the underlying loans, not an assessment of a balance sheet, and the two kinds of AAA have not historically behaved the same way under stress.
How a rating is produced
The dominant business model is issuer-pays: the borrower commissions and pays for its own rating, and the resulting grade is then published free for anyone to read. Subscriber-paid ratings and unsolicited ratings exist but make up a small share of the market. Sovereign ratings act as a practical ceiling on the corporates domiciled in that country, so a sovereign downgrade frequently drags a list of unrelated companies down with it.
Analysts examine the business — industry position, competitive standing, scale — alongside the financials — leverage, interest coverage, cash generation — the structure of the specific debt — seniority, collateral, covenants — and any parent-company or government support that might stand behind the borrower. A rating committee votes on the outcome rather than a single analyst deciding alone, and the issuer is notified before publication and may appeal on factual grounds.
Once assigned, a rating is surveilled continuously, and changes are made in notches rather than smoothly. An issuer can be cut several notches in one action when something breaks — a covenant violation, a failed refinancing, a sudden loss of a major customer — rather than sliding down one grade at a time.
The Credit Rating Agency Reform Act of 2006 and the Dodd-Frank Act of 2010 tightened registration, disclosure and conflict-of-interest rules for the agencies, largely in response to the structured-finance failures of 2007 and 2008.
Where they mislead
The 2007 to 2008 crisis is the standing example. AAA grades on mortgage-backed securities and collateralised debt obligations rested on correlation assumptions that broke all at once, and enormous volumes of top-rated paper were downgraded or defaulted within a short span. S&P and Moody's later settled claims brought by the US Department of Justice and several states over their pre-crisis structured-finance ratings.
Issuer-pays is a structural conflict built into the model: the entity being rated selects and pays the agency doing the rating, and can shop the assignment among agencies before committing to one. Ratings also tend to lag the market — prices normally move to reflect a deteriorating credit well before an agency acts, so a downgrade is often confirmation of what the market already priced in, not new information.
The line between BBB−/Baa3 and BB+/Ba1 creates mechanical selling that has nothing to do with judgment. Funds barred by mandate from holding high yield must sell a downgraded 'fallen angel' regardless of price, which can move the bond for reasons unconnected to the company's condition that particular week.
A rating addresses credit risk alone. It says nothing about interest-rate risk, liquidity, call risk, or whether the current price is reasonable — a AAA thirty-year bond can lose a third of its market value to rising rates while its rating stays completely untouched.
Where you will meet them on this site
On corporate and municipal bond pages, the rating is the main input into the yield spread quoted over the matching-maturity Treasury — the lower the rating, the wider the spread demanded to compensate for default risk.
On preferred stock pages, a company's preferred issue is typically rated several notches below its own senior debt, reflecting the subordination built into the preferred structure.
In the definition of high yield used across the site, the category is a ratings boundary — everything below BBB−/Baa3 — rather than a yield level, which is why 'high yield' and 'junk' shift in absolute yield terms as rates move.
In money-market fund mechanics, short-term ratings feed directly into the credit-quality tests of SEC Rule 2a-7, and on the private credit and CLO pages, tranche ratings determine which regulated institutions are permitted to buy which slice of the deal.
What to remember
- A credit rating is a paid-for opinion about the likelihood of repayment, not a measurement, a price target, or a recommendation.
- The letters are ordinal — AA outranks A — but the agencies do not attach a fixed default probability to the gap between grades.
- The line between investment grade and high yield, BBB−/Baa3 versus BB+/Ba1, triggers mechanical buying and selling in many funds regardless of the company's actual condition.
- Ratings address credit risk only; they say nothing about interest-rate, call, or liquidity risk, so a top-rated bond can still lose significant market value.
- Ratings typically lag the market rather than lead it, and the same letter grade means something structurally different on a corporate bond than on a securitised tranche.
- The issuer-pays model, used by Moody's, S&P and Fitch, is a standing conflict of interest that survived tighter regulation after the 2007–2008 crisis.
This page explains how the income type works, which does not change from week to week, so it deliberately carries no rate and no price. The links below go to the pages that hold the current figures for it, each one stamped with the date the data was pulled. Read the mechanism here first: the numbers there are far easier to judge once you know what they are measuring.
See the live numbers: Bonds, Private Credit.
Frequently asked
What does investment grade actually mean?
Who pays for a credit rating?
Is a AAA rating a guarantee?
What is a fallen angel?
Written for information only. Nothing here is investment, tax or legal advice, and no page on this site recommends buying or selling anything. Rules and tax treatment change; verify anything that matters with a professional who knows your situation. This explainer was drafted by a language model (claude-sonnet-5) from an editor-approved outline and fact sheet, under the rules set out in our editorial policy, and carries no market figures. Last updated Jul 29, 2026.