How Are Municipal Bonds Rated?

How municipal bonds are rated is one of the easiest questions to answer in all of investing: They are rated on the creditworthiness of the issuer.

Issuer Credit

If a municipal bond issuer is highly rated, meaning that entity is believed to have a low risk of default, it will receive a high rating. Issuers that ratings agencies believe to be high default risks receive low ratings.

Major Ratings Agencies

The major municipal bond ratings agencies are Moody's, Standard & Poor's and Fitch.

How Ratings Are Applied

In addition to credit worthiness, ratings agencies will evaluate the economy, demographic trends, debt structure and financial practices of the issuer.

Good Ratings

Any time an investor sees a triple A (AAA) rating, that is means the municipal bond issue has the highest rating possible. The next best quality of bonds will be rated with two A's and a number (i.e. AA1) or two A's and a plus or minus sign.

Medium Ratings

Medium ratings usually have a single A with a number or a plus or minus sign.

Riskier Issues

Riskier municipal bonds are rated with the letter "B." Some may have numbers or plus or minus signs. Regardless, these are lower-grade issues.