The price of bonds are affected by their credit ratings.
Companies and financial instruments (securities) sold in the open market receive credit ratings. These ratings can affect the price of bonds through interest rates and market value.
Ratings
The major credit-rating agencies (Standard & Poor's, Moody's and Fitch) assign letter ratings based on the financial health and risk associated with a company or security. The highest credit rating is "AAA" and the lowest is "D."
Time Frame
A bond with a low credit rating is likely to have a short term or time to reach maturity. Most investors will not want to invest in high-risk for a long time. An issuer may call in a bond or repay it early.
Interest
The higher a company's credit rating, the less risk of default. This translates into lower interest paid by the issuer because the bond is considered a safer investment.
Default
Bond issuers can default on the repayment of bonds, causing credit ratings and bond prices to fall simultaneously. In bankruptcy cases, bondholders may be paid pennies on the dollar for bonds.
Market Value
A poor credit rating can negatively affect a bond's market value. Investor confidence is likely to diminish and the bond becomes less attractive to the marketplace.
