Average credit quality gives a snapshot of the portfolio�s overall credit quality. A bond�s average quality is a reflection of the amount of risk a manager is willing to incur, and management style in general. It is an average of each bond�s credit rating, adjusted for its relative weighting in the portfolio. Average credit quality is used to determine the vertical axis of Morningstar�s bond style boxes.
For corporate-bond and municipal bond funds, Morningstar also shows the percentage of fixed-income securities that fall within each credit-quality rating, as assigned by Standard & Poor's or Moody's. Because it's rare to find individual bonds in a portfolio with a rating below B, the average credit quality of bond funds in Morningstar's database ranges from AAA (highest) to B (lowest). U.S. Government bonds carry the highest credit rating, while bonds issued by speculative or bankrupt companies usually carry the lowest credit ratings. Anything at or below BB is considered a high-yield or "junk" bond. For the purpose of Morningstar�s calculations, U.S. government securities are considered AAA bonds, nonrated municipal bonds generally are classified as BBB, and other nonrated bonds generally are considered B.