Which statement best describes bond ratings?

• A. A bond rating is a grade given to a bond according to its risk of defaulting.
• B. A bond rating is the current market price of the bond
• C. A bond rating determines the coupon rate
• D. A bond rating indicates the issuer stock performance

Answer: (A)

Bond ratings measure credit risk—the likelihood that the issuer will default on interest or principal payments. They’re assessments of the issuer’s creditworthiness, not of the bond’s current price, its coupon rate, or how the issuer’s stock might perform. A higher rating means lower default risk and typically a lower yield, while a lower rating signals higher risk and requires a higher yield to attract investors. Ratings come from agencies and can change if the issuer’s financial condition improves or deteriorates, but they do not set the coupon or determine market price directly.