What does a Credit Rating assess?

A credit rating specifically assesses the creditworthiness of a bond issuer, which can include municipalities, governments, or corporations. This evaluation is performed by credit rating agencies that assign ratings based on various factors that indicate the likelihood of default on debt obligations. These factors typically include the issuer's financial health, historical payment record, economic conditions, and debt levels relative to income or revenue sources.

This assessment is critical for investors as it provides insight into the risk associated with investing in a specific bond. A higher credit rating suggests lower perceived risk and can lead to lower interest rates on borrowed funds, whereas a lower credit rating can increase borrowing costs due to higher perceived risk. Understanding the credit rating helps investors make informed decisions regarding their investments in bonds issued by municipalities and other entities.