# AAA Credit Rating Explained: Definition, Criteria, and Bond Types

![Triple A (AAA)](https://www.investopedia.com/thmb/q69VJjhG8Tb94Ydo-1Z55Hdzrq4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/aaa.asp-final-1-e41eb49414014345aac663188c633d93.png)

*— Investopedia / Joules Garcia*

## What Is a AAA Credit Rating?

The AAA credit rating is the highest rating possible for [bonds](https://www.investopedia.com/terms/b/bond.asp) and indicates a bond issuer's noteworthy [creditworthiness](https://www.investopedia.com/terms/c/credit-worthiness.asp) and financial strength. It communicates to investors a minimal risk of default. Leading agencies such as [Standard & Poor’s (S&P)](https://www.investopedia.com/terms/s/sp.asp) and [Fitch Ratings](https://www.investopedia.com/terms/f/fitch-ratings.asp) issue the AAA rating. [Moody’s](https://www.investopedia.com/terms/m/moodys.asp) issues its Aaa rating under the same circumstances. These ratings can change with changes in financial conditions. Both S&P and Fitch have downgraded the credit rating of the United States due to the agencies' views of the nation's financial stability and the government's questionable policy decisions.

### Key Takeaways

*   AAA Credit Rating Defined: The AAA credit rating is the highest rating possible for bonds, indicating exceptional creditworthiness with minimal risk of default. It is assigned by leading agencies like Standard & Poor's and Fitch, and denotes the issuer's strong financial health.
*   Benefits of AAA-rated Bonds: Bonds with AAA ratings are considered secure investments due to low default risk, but as a trade-off, they typically offer lower yields compared to bonds with lower credit ratings. This balance reflects the relationship between risk and return.
*   Impact of Ratings on Borrowing Costs: High credit ratings, like AAA, allow issuers to borrow at lower costs, providing them with a competitive edge. Lower borrowing costs can enable companies to expand operations or undertake new projects more cost-effectively.
*   Variety in AAA-Rated Bonds: AAA-rated bonds can include both municipal and corporate bonds, with some secured by collateral and others unsecured. Each type carries different risk profiles affecting yield and investor appeal.
*   Credit Ratings and Financial Stability: The global credit crisis in 2008 affected many AAA ratings, illustrating the potential vulnerability of such ratings to economic conditions. High ratings are not immune to downgrades due to financial instability or policy decisions, as seen in the U.S. downgrade by S&P in 2011 and by Fitch in 2023.

## Exploring the Benefits and Implications of AAA Credit Ratings

[Credit ratings](https://www.investopedia.com/terms/c/creditrating.asp) are assessments or opinions of the creditworthiness of a business or government. They indicate how likely the subject is to meet financial obligations and pay bills. Investors can use these ratings to decide whether countries and bond offerings are safe investments. These ratings are assigned by credit rating agencies, notably S&P, Moody's, and Fitch.

AAA and Aaa ratings are considered to be [investment grade](https://www.investopedia.com/ask/answers/what-does-investment-grade-mean/). Because they are seen as low-risk for [default](https://www.investopedia.com/terms/d/default2.asp), these bonds offer investors lower [yields](https://www.investopedia.com/terms/y/yield.asp) compared to others with similar [maturity](https://www.investopedia.com/terms/m/maturity.asp) dates. Default means a bond [issuer](https://www.investopedia.com/terms/i/issuer.asp) fails to make [interest](https://www.investopedia.com/terms/i/interest.asp) payments or repay the [principal](https://www.investopedia.com/terms/p/principal.asp) on time.

AAA ratings are given to government [debt](https://www.investopedia.com/terms/d/debt.asp) and companies’ corporate bonds. The 2008 [credit crisis](https://www.investopedia.com/terms/c/credit-crisis.asp) caused many companies, including General Electric ([GE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GE)), to lose their AAA ratings. As of August 2023, only two companies held the AAA rating outright: Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)) and Johnson & Johnson ([JNJ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=JNJ)). Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) is split, with an Aaa rating by Moody’s and an AA+ (one notch below AAA) from S&P.

Even the United States suffered a ratings cut by S&P, to AA+ in 2011—losing its vaunted AAA status due to political infighting over raising the [debt ceiling](https://www.investopedia.com/terms/d/debt-ceiling.asp). Moody’s and Fitch maintained the U.S. at Aaa and AAA ratings, respectively. Fitch downgraded the U.S. rating from AAA to AA+ in August 2023. The agency cited potential issues with financial deterioration over the next three years and rising [national debt](https://www.investopedia.com/updates/usa-national-debt/).

> **Important**
>
> Investors should balance AAA-rated bonds with higher-yield options like corporate bonds to diversify fixed-income exposure.

## Examining Different Types of AAA-Rated Bonds

### Municipal

[Municipal bonds](https://www.investopedia.com/terms/m/municipalbond.asp) can be issued as either revenue bonds or general obligation bonds, with each type relying on different sources of income.

Revenue bonds, for example, are paid using fees and other specific income-generating sources, like city pools and sporting venues. On the other hand, general obligation bonds are backed by the issuer’s ability to raise [capital](https://www.investopedia.com/terms/c/capital.asp) through levying taxes. State bonds rely on state income taxes, while local school districts depend on property taxes.

### Secured and Unsecured

Issuers can sell both secured and unsecured bonds. Each type of bond carries with it a different risk profile.

A [secured bond](https://www.investopedia.com/terms/s/securedbond.asp) means that a specific asset is pledged as [collateral](https://www.investopedia.com/terms/c/collateral.asp) for the bond, and the [creditor](https://www.investopedia.com/terms/c/creditor.asp) has a claim on the [asset](https://www.investopedia.com/terms/a/asset.asp) if the issuer defaults. Secured bonds might be backed by assets like equipment, machinery, or real estate. Secured collateralized offerings may have a higher credit rating than unsecured bonds sold by the same issuer.

Conversely, [unsecured](https://www.investopedia.com/terms/u/unsecured.asp) bonds are simply backed by the issuer’s promise to pay. Therefore, the [credit rating](https://www.investopedia.com/terms/c/creditrating.asp) of such instruments relies heavily on the issuer’s income sources and business outlook.

## Advantages of Holding a AAA Credit Rating

A high credit rating reduces borrowing costs for issuers. Therefore, it stands to reason that companies with high ratings are better positioned to borrow large sums of money than [fixed-income](https://www.investopedia.com/terms/f/fixedincome.asp) instruments with lesser credit ratings. And a low cost of borrowing affords firms a substantial competitive advantage by letting them easily access credit to grow their businesses.

For example, a business may use the incoming funds from a new bond issue to launch a new product line, set up a shop in a new location, or acquire a competitor. All of these initiatives can help a company increase its market share and thrive over the long haul.

## Why Is a Credit Rating So Important?

The level of credit rating that an issuer receives has significant implications on the cost of borrowing in the open market. The better the credit rating—with AAA being the best—the lower the cost to borrow, and vice versa.

As an [investor](https://www.investopedia.com/terms/i/investor.asp), you’ll need to balance the risk you’re willing to take against the yield you’re seeking.

## Who Decides What Credit Rating a Debt Issuer Receives?

There are three major credit rating agencies: Standard & Poor’s (S&P), Moody’s, and Fitch. They assess a debt issuer’s creditworthiness and ability to pay interest and principal on bonds based on multiple factors, such as the company’s cash flow, the amount of other outstanding debt, and the business outlook for the issuer, to name just a few criteria.

## What Does the AAA Credit Rating Mean?

The AAA credit rating is only given to the most creditworthy debt issuers and allows investors to gauge the amount of risk in their fixed-income [portfolio](https://www.investopedia.com/terms/p/portfolio.asp). Conservative investors will typically sacrifice return or yield to own the highest credit rating issues available.

## Conclusion: The Impact of AAA Ratings on Borrowing Costs

AAA/Aaa ratings are the highest ratings issued by the credit-rating agencies for bonds by S&P, Moody’s, and Fitch. They indicate the lowest risk of default and the highest degree of creditworthiness and can mean lower borrowing costs (and, unfortunately, yields). Conservative investors look to AAA ratings despite their lower return potential as compared to issues with lower ratings and higher yields. The AAA rating can change if economic factors or financial conditions affect the financial stability, safety, and outlook of a company or organization. For instance, the credit rating of the U.S. government was dropped in 2011 and 2023 due to its policy decision-making and financial position.

> **Article Sources**
>
> 1.  Fitch Ratings. “[Fitch Downgrades GE and GE Capital to ‘BBB’; Outlook Stable](https://www.fitchratings.com/research/non-bank-financial-institutions/fitch-downgrades-ge-ge-capital-to-bbb-outlook-stable-12-04-2020).”
>     
> 2.  Investor's Business Daily. "[2 Remaining AAA-Rated Companies Shine As U.S. Gets Downgraded](https://www.investors.com/etfs-and-funds/sectors/sp500-companies-cling-to-aaa-rating-as-u-s-risks-being-a-deadbeat/)."
>     
> 3.  Microsoft. “[Investor Relations: Frequently Asked Questions: What Is the Credit Rating of Microsoft?](https://www.microsoft.com/en-us/Investor/FAQ.aspx)”
>     
> 4.  Yahoo! “[Johnson & Johnson—Moody’s Affirms J&J’s Aaa Rating; Negative Outlook](https://www.yahoo.com/now/johnson-johnson-moodys-affirms-j-152705591.html).”
>     
> 5.  S&P Global Ratings. "[Apple Inc.'s Senior Unsecured Notes Assigned 'AA+' Issue-Level Rating](https://disclosure.spglobal.com/ratings/jp/regulatory/article/-/view/type/HTML/id/2983149)."
>     
> 6.  National Credit Union Administration. "[Impact of US Debt Downgrade](https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/impact-us-debt-downgrade)."
>     
> 7.  Fitch Ratings. "[Fitch Downgrades the United States' Long-Term Ratings to 'AA+' from "AAA"; Outlook Stable](https://www.fitchratings.com/research/sovereigns/fitch-downgrades-united-states-long-term-ratings-to-aa-from-aaa-outlook-stable-01-08-2023)."