Explanations And Examples On Bond Ratings That’ll Help You Make The Right Choice.

If you're and investor interested in bonds and bond ratings, the best place to look for help is from various bond rating agencies. Standard & Poor's and Moody's are the most well known, but there are many others available. DBRS in Canada and Fitch are another two examples of reputable bond rating agencies. Basically these agencies provide investors with thoroughly researched ratings on the risks associated with buying a particular company's (or government's) bond.

Stocks frequently get recommendations from analysts. Bond ratings get assigned over 20 different possible designations, from AAA (Highest Grade) to C (May Be In Default) or worse. And those designations are backed by some of the most thorough historical and technical research on the planet. The local geology of most cities is less well understood than the financial condition of many companies.

Because of select fixed characteristics (unlike stocks, for example, bonds always have an associated interest rate (which is sometimes zero) and a set maturity date) bonds are more predictable. Those two factors alone makes possible the use of an array of mathematical tools to provide predictions of future yields and price with a confidence unmatched by any other investment.

Standard and Poor's rates around 2,000 domestic and foreign companies, 8,000 government entities, and 1,300 commercial paper-issuing entities. Moody's rates over 19,000 long-term debt issues, 28,000 municipals, and 2,000 commercial paper issuers.

Some of the more common and useful ratings are explained below:

• Aaa (AAA)
  Bonds rated Aaa are judged to be of the best quality, carrying the smallest degree of investment risk. Interest payments are typically protected by a large or exceptionally stable margin and the principal is believed secure.

• Baa (BBB)
  Baa rated bonds are considered medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security are thought adequate at the time the rating is made, but might prove unreliable over time. Such bonds are less secure and have some speculative characteristics too.

• B (B)
  Bonds with B rating are generally considered speculative. Interest and principal payments are not assured.

Bond agencies usually make clear that credit ratings don't represent recommendations one way or the other, but taking them into account is common practice. But remember, bond ratings for a particular issue can change over time, as the issuer's fortunes wax or wane.

In general, bonds with higher ratings tend to have lower yields. Higher risk bonds offer higher yields and/or lower prices in order to attract investors. These so-called high yield or 'junk bonds' (below Baa/BBB) aren't necessarily bad investments.

Bond Rating