- Credit risk is the possibility that an issuer cannot make promised interest or principal payments.
- A credit rating is an opinion about relative credit risk, not a guarantee and not a complete valuation.
- Higher yield can be compensation for higher default, liquidity, call, or structural risk.
- Read the issuer, seniority, maturity, covenants, and current financial condition alongside the rating.
Credit ratings and issuer conditions can change. Verify the current rating, issuer disclosures, maturity, seniority, and market price before relying on an older document.
Start with the borrower and the promise
Identify who owes the money, what entity legally issued the bond, where the claim sits in the capital structure, and what cash flows are promised.
Use ratings as one input
Ratings can help organize relative credit risk, but agencies use methodologies and judgments that can change as information changes. Compare current ratings with issuer financials and market pricing.
Separate credit spread from total yield
A bond can offer a higher yield because investors demand compensation for credit risk, liquidity risk, optionality, or other uncertainty. Do not interpret the highest yield as the best income choice without identifying the source of the yield.
Diversify issuer and maturity exposure
A portfolio can be concentrated even when it owns many individual bonds if the issuers depend on the same industry, region, financing condition, or economic driver.