There is no rating above AAA.
Government bonds. Treasury bonds and bills. Guaranteed by the government so always AAA.
Municipal bonds. A little different animal than government bonds. State, city or local governments issue these. Generally considered very low risk. Nearly always AAA. Municipal bonds have different credit criteria and rating system then corporate bonds. Favored by those with a large tax burden as interest is federally and often state tax exempt.
Agency bonds. Major ones include Ginnie Mae, Fannie Mae, Freddie Mac, Sallie Mae, Federal Home Loan Bank. Always AAA rated. Of those listed only Ginnie Mae and Sallie Mae (I think) are guaranteed by the government. The two biggest issuers of mortgage-backed securities, Fannie Mae and Freddie Mac are not.
Corporate bonds. Basically a loan to the corporation and a promise to repay to the bondholder. This is where the rating agencies provide their input. Major agencies are Moody's, Standard and Poors and Fitch. They rate the company itself, not each individual bond issuance. Different financial metrics are examined to determine the likelihood of default. Things like debt-to-equity ratios, cash flow, ROE. interest coverage ratios, etc are evaluated and a rating is determined. Rating is important becasue it determines the rate at which a bond will be issued. Lower rated companies have to pay higher yields to compensate for the risk.
Corporate debt can be AAA rated but those companies that are have to have a pretty darn good balance sheet. When things start to go south you will see "downgrades" of corporate debt. It is much better to get an upgrade obviously.
Anything down to BBB is considered "investment grade". Anything lower is called "non-investment grade" or if you want to make it sound better it is often called "high yield".
. I'll let you figure out this one yourself.
