How can high credit ratings affect bonds?

High credit ratings are key indicators of a bond issuer's financial stability and likelihood of repaying its debt obligations. When a bond has a high credit rating, it reflects a lower likelihood of default, which inherently reduces the perceived risk associated with investing in that bond.

As a result of this reduced risk, investors tend to feel more confident in purchasing bonds with high credit ratings, which increases demand for those bonds. To attract this demand, issuers can offer bonds at lower interest rates compared to similar instruments with lower credit ratings. This phenomenon occurs because investors are willing to accept a lower return (in the form of interest) for the higher security that comes with a bond rated as high quality. Consequently, high credit ratings typically lead to lower interest rates for bonds, making this the correct choice in understanding how credit ratings impact the bond market.