Rating Bonds as Investments

There are a number of bodies responsible for rating bonds as investments. These organizations are not controlled by the government. They include Standard & Poor's and Moody's. The groups use a grading system of A, B, C and many levels in between to determine if a bond is a good investment. You can use the system to understand which bonds to avoid.

A, B, C System

In this system, A rated bonds are safer than D rated bonds. The rating system is based on how likely it is the bond issuer will default on the payment. The likelihood is determined by an analysis of company information and business plans. Within the A, B, C system, there are levels from AAA to C with pluses and minuses in between. An AAA rated bond is safer than an A rated bond. An A- rated bond is safer than a BBB+ bond.

Investment Grade

An investment grade bond, simply, has a rating of BBB- or higher. The cut off is between BBB- and BB+, so the minor change between the two can represent a large difference. As long as a bond is "investment grade," there is a low chance it will default. The lower rated bonds offer more risk, but they are typically cheaper to compensate for this risk.

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