What is 'Credit Quality'

Credit quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. As the term implies, credit quality informs investors of a bond or bond portfolio's credit worthiness or risk of default. A company or security’s credit quality may also be known as its “bond rating."

BREAKING DOWN 'Credit Quality'

Credit quality is an important aspect of the credit markets. An individual bond or bond mutual fund's credit quality is determined by private independent rating agencies such as Standard & Poor's, Moody's and Fitch. Each rating agency has its own credit quality designations which typically range from high ('AAA' to 'AA') to medium ('A' to 'BBB') to low ('BB', 'B', 'CCC', 'CC' to 'C').

Credit rating agencies issue credit quality ratings for all types of issuers in the credit market. Factors influencing a corporate credit rating include the company’s capital structure, credit payment history, revenue and earnings. (See also What Is a Corporate Credit Rating?)

Credit quality ratings for developed market countries, such as the U.S., are typically on the higher end of the credit quality spectrum and offer investors investments with low risk of default. In the credit market, investment-grade ratings are typically perceived as high quality. Non investment-grade bonds, also called high-yield or junk bonds, have lower credit quality and higher risk. Investment-grade bonds often have lower yields while non-investment grade bonds require higher yields for the greater potential risk.

Investors interested in the safety of their bond investments should stick to investment grade bonds ('AAA', 'AA', 'A', and 'BBB'), while other investors willing and able to accept a higher level of risk could consider lower credit-quality bonds with higher yields.

Credit Quality Investing

In the investable market, investors have a wide range of mutual funds to choose from with varying credit qualities. Mutual funds offer investors the opportunity to invest in a diversified portfolio of bonds with targeted credit quality exposure. Below are examples of some of the top bond funds in the government and high yield credit quality categories.

Eaton Vance Short Duration Government Income Fund

This fund focuses on short-term U.S. government debt. The Fund offers A, C and I share classes. It invests in high-quality, short-term U.S. government and U.S. government agency bonds. The Fund’s average duration is less than three years which gives it limited interest rate risk. As of December 4, 2017, the Fund had a one year return of 2.17%. Its expense ratio is 0.90%.

Highland Opportunistic Credit Fund

The Highland Opportunistic Credit Fund is one of the top performing funds in the high yield category. Its one year return as of December 4, 2017 was 15.28%. The Fund has an expense ratio of 1.30%. The Fund invests for total return. As of September 30, 2017, 28% of the Fund was invested in CCC securities.

RELATED TERMS
  1. Investment Grade

    Investment grade refers to bonds that carry low to medium credit ...
  2. Credit Spread

    A credit spread is the difference between Treasury securities ...
  3. Credit Analyst

    A credit analyst is a financial professional who possesses expertise ...
  4. Bond Rating

    A bond rating is a grade given to bonds that indicates their ...
  5. Credit Reporting Agency

    A credit reporting agency is a business that maintains historical ...
  6. High-Yield Bond

    A high-yield bond pays a higher yield due to having higher risk ...
Related Articles
  1. Investing

    Corporate Bonds: An Introduction to Credit Risk

    Understand how corporate bonds often offer higher yields, and discover how it is important to evaluate the risk, including credit risk, that is involved before you buy.
  2. Financial Advisor

    Top 5 Corporate Bond Mutual Funds (DEECX, FCBFX)

    These mutual funds may be of interest to investors who want to invest in corporate bonds and have some tolerance for interest rate fluctuations.
  3. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  4. Investing

    Investing in Bonds: A Look at Returns and Risks

    A look at the risks, returns and ratings of different types of bonds.
  5. Investing

    The Top 5 Bond Mutual Funds for 2016

    Learn about bond mutual funds that investors may want to consider for 2016. Understand why the risk of rising interest rates is a concern heading into 2016.
  6. Investing

    Five Key Bond Moves to Profit from Rising Yields

    Here are five key moves to consider for structuring portfolios to profit from rising yields.
  7. Investing

    Six biggest bond risks

    Bonds can be a great tool to generate income, but investors need to be aware of the pitfalls and risks of holding corporate and/or government securities.
  8. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  9. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  10. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
RELATED FAQS
  1. What causes a bond's price to rise?

    Should you invest into bonds? Learn about factors that influence the price of a bond, such as interest rates, credit ratings, ... Read Answer >>
Trading Center