What do bond ratings indicate?

Bond ratings primarily indicate the creditworthiness of the issuer and the likelihood that the issuer will be able to meet its debt obligations, which includes making interest payments and repaying the principal at maturity. These ratings are provided by credit rating agencies and assess the risk of default associated with a bond. A higher rating suggests that the bond has a lower risk of default, while a lower rating indicates a higher risk.

These ratings are crucial for investors as they help in making informed decisions about the credit risk involved in purchasing a particular bond, influencing the bond's pricing and yield. Therefore, the statement about it being a grade based on its risk of default accurately captures this essential function of bond ratings.

In contrast, the other concepts outlined do not pertain directly to bond ratings. For instance, while market value is related to supply and demand dynamics in the bond market, it does not specifically measure creditworthiness. The interest rate, or coupon rate of a bond, is determined at issuance and does not relate to how a bond is rated in terms of risk. The duration until maturity informs about the time frame of the investment but does not reflect the bond's quality or credit risk. Thus, the correct choice about bond ratings providing a grade based on the risk of