Learn more about bond credit quality

Credit quality measures the ability of a bond issuer to repay a bond's interest and principal in a timely manner. Some issuers, notably the U.S. government, are financially stronger than others and are likely to have higher credit quality ratings. An issuer with a low rating will almost certainly pay a higher interest rate than an issuer with a high credit rating. A bond's credit rating reflects an independent rating agency's opinion of the issuer's ability to pay interest on the bond and ultimately to repay the principal upon maturity.

Broad diversification of bond holdings helps to reduce risk. Investors may also choose not to diversify (within limits) if they're aware of the trade-offs. For example, an investor may concentrate on Treasury bonds to eliminate credit risk (at the cost of lower returns over the long term compared with investing in corporate bonds).

How we determine bond credit quality

This analysis includes both individual bonds and bond funds in your portfolio. The "taxable" bond category includes all Treasury, agency, mortgage, and corporate bonds, regardless of the registration type they're in. For example, a Treasury bond in an IRA is still grouped in the "taxable" bond category.

Bond funds are categorized based on their 9-box bond style. The only exceptions are the share classes of the Vanguard® Total Bond Market Index and Balanced Index Fund, which are divided according to the breakdown of the Barclays Aggregate Index.

Vanguard uses a fund's long-term focus to determine its 9-box category. Individual bonds are classified according to their Moody's rating. Aa3 and above is "high" quality; A through Baa3 is "medium"; and Ba and below is "low." In some cases, assets are labeled "uncategorized." This occurs when we have insufficient data to classify the asset.

For Vanguard funds and brokerage holdings, prices and shares used to compute your account value are as of the previous business day. For investments you entered in Outside Investments, prices may be from today's close, especially if you're viewing them after the market close, which is generally 4 p.m. Eastern time.

Investments in bonds and bond funds are subject to interest rate, credit, and inflation risk. Diversification does not ensure a profit or protect against a loss in a declining market.