What is the role of credit rating agencies related to municipal bonds?
One way to evaluate a municipal securities issuer is to examine its credit rating. Credit rating agencies assign credit ratings based on their analysis of an issuer’s ability to make interest payments and repay principal in a timely manner. (Credit rating agencies also grade corporate bonds, but their analysis of corporate bonds differs from their analysis of municipal bonds.) Bonds rated BBB or Baa, or better, are characterized as “investment grade,” meaning that they have a high probability of being repaid and have few speculative features. Municipal bonds with lower or no ratings carry higher risks, but may also pay the investor higher interest rates to compensate for that risk. In addition to the ratings provided by credit rating agencies, most institutional investors, including investment companies, conduct their own credit analysis.
