What is a commonly used method for evaluating a bond's creditworthiness?

Evaluating a bond's creditworthiness is essential for understanding the risk associated with investing in that bond. Credit rating agencies, such as Standard & Poor's, Moody's, and Fitch, assess the credit risk of borrowers, including corporations and governments, by analyzing their financial health and likelihood of default. These agencies provide ratings that reflect a borrower's credit quality, which helps investors make informed decisions about bond investments.

These ratings consider various factors, including the issuer's financial stability, revenue sources, debt levels, and overall economic conditions. High ratings indicate a lower risk of default, while lower ratings suggest higher risk. Consequently, credit rating agencies serve as a critical resource for investors who want to gauge the creditworthiness of bonds effectively. This is why using credit ratings is the most common and reliable method for assessing bond creditworthiness.