A municipal bond's rating tells investors the level of credit risk involved in purchasing that bond, according to MunicipalBonds.com. A rating such as AAA denotes the strongest level of creditworthiness and the lowest risk. A rating such as C indicates poor creditworthiness and a very high risk of default.Continue Reading
Bonds with high ratings tend to have a lower yield than those with low ratings, since they present less risk to the investor, explains MunicipalBonds.com. Conversely, for investors to take chances with a risky bond, there must be a chance of an extremely good yield to compensate for that risk. To determine the credit rating of a municipal bond and its issuer, the agencies take into consideration a variety of financial and economic factors that affect the issuer's creditworthiness. These include factors such as the area's median income, tax revenue, population growth, and the number and type of industries that the local economy depends on.
The three major ratings agencies are Moody's, Fitch ,and Standard and Poor's, also known as S&P, says MunicipalBonds.com. S&P and Moody's re-evaluate bonds and bond issuers on an ongoing basis, upgrading or downgrading their ratings accordingly. The downgrade of a bond leads to a higher yield for potential investors and a lower cost, but this puts the current investors at greater risk of losing money on the bond.Learn more about Investing