Bond rating
Just like personal credit scores, the bond markets have their own credit system that decides a corporations credit rating or score. Bond ratings range from D all the way to AAA, the top of credit score.
Other than bankers on Wall Street, few know what these rating actually mean and why they are important. Far fewer actually know how theses ratings are achieved and when each company receives a good or bad rating. The rest of this article will be dedicated to defining credit ratings and what each rating means.
AAA and AA bonds are considered the best bonds on the market. Typically these bonds include municipal bonds and blue chip corporate debt. These bonds may be insured by a third party, which gives them the rating of Triple-A. Many municipal bonds are insured against loss, making them a great investment.
AA and BBB are considered middle investment grade. These bonds are typically included in funds sold as high yield bond funds. They pay better interest than Triple-A bonds but do come with added risk. The list of corporations with these bond ratings is
usually filled with middle cap companies and small uninsured municipal bonds.
BB, B, CCC, CC, C are all considered non-investment grade bonds otherwise known as junk bonds. These bonds trade at heavy discounts and offer high interest rates to make up for their bad financial situations. These bonds might just be falling stars such as a General Motors or small businesses that have hardly established a credit rating. This category is a mixed bag of corporations from large to tiny and upcoming stars to the worst investments on earth.
D stands for default. These bonds are on the D list for failure to pay interest or principal. This category is usually filled with companies in bankruptcy or filling for bankruptcy. Purchasing these bonds would be a very bad mistake but some do eventually recover or strike a buyout plan. These bonds trade at heavy discounts to face value simply because of the low chance of seeing any return. Very rarely are there any buyers for a D rated bond, just sellers. Bondholders are in a better stance to receive a payment than stockholders, who usually get nothing when a corporation closes its doors.
With these ratings in mind consider wisely before placing your next investment. A lot of due-diligence is required for active trading in the bond markets. Triple A rated bonds may not always be your best bet, a lot of Triple A rated bonds would be lower rated if not backed by insurers.
Generally AAA-BBB bonds are held by common bond funds. AAA is the only rating that is included in fixed income investments while high yield bond funds occasionally dip into the lower B ratings. It is important to remember that ratings are not a clear cut indicator of risk, many D rated bonds were once rated Triple A and visa versa. It is important to consider all factors before buying a corporate bond.