The degree by which a natural or legal person is able to pay off its loans and meet its financial obligations. The higher the ability to do so, the better the credit quality. A good or excellent quality implies the ability to do so without any delay or default on a single payment. Credit quality reflects the financial solvency of a person, a firm (e.g., a bank: credit quality of a bank), or a government. Credit scores and credit ratings are measures of credit quality.

For instruments such as bonds, the credit quality of an individual bond or bond issue is determined by credit rating agencies, according to a certain credit quality designation. Credit ratings typically range from high (‘AAA’ to ‘AA’) to medium (‘A’ to’ BBB’) to low (‘BB’, ‘B’,’CCC’ and ‘C’), depending on the agency. For an issuer, credit rating involves factors such as the capital structure of the issuer, history of credit payments, revenue, and earnings.

In the credit market, bonds having investment-grade ratings (known as investment grade bonds) are perceived to be of high quality (which reflects a very low credit risk). For that very reason, investment-grade bonds produce lower yields.

On the other hand, non-investment-grade bonds, also known as high-yield/ junk bonds, are considered to be a bad risk- i.e., carrying lower credit quality and higher risk. Holders of non-investment grade bonds require higher yields as a compensation for the greater risk.