Where Credit Is Due: A Look at the Ratings
There are many factors that individuals must consider when making investments in fixed-income securities. Current bond yields, current bond prices, and current as well as future interest rates all may have a big impact on the return of a fixed-income investment.
One other factor investors need to evaluate is the credit quality of the issuer and the particular bond. Individuals investing in fixed-income securities typically have two major concerns:
In this article
- What Is a Credit Rating?
- How Bonds and Issuers Are Rated
- Ratings Over Time
- Ratings Scales
- What Ratings Do—and Don’t—Reveal
- For More Information
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- How likely am I to get my money back at maturity? and
- How likely am I to get my interest payments on time?
Treasury securities, backed by the credit of the U.S. government, are regarded by most investors as “safe” in terms of these two questions, with no credit risk. But what about the credit risk of other issues and issuers?
Credit ratings offer one tool investors can use to help answer these questions.
To read more, please become an AAII Registered User or CLICK HERE.
Discussion
This is simplistic at best. Example, I have a bond bought as AAA insured by MBIA. Bond does not have underlying rating established. MBIA was downgraded to BBB so bonds are downgraed to BBB even though they are ESCROWED to maturity and should be AAA. Bond ratings can drop several grades at once reflecting the raters inability to track financial condition changes. The investor has a better feel for his bond by reading published financials from the municipality; but, these are often late or not released. More regulation is needed to monitor bond sales and reporting requirements.
posted about 1 year ago by John from California
She should have covered Tier 1 bonds
Tier 1 bonds are lower-rated bank bonds. That means, if the issuer defaults, all of the bank’s other creditors must be repaid before the bond investors recoup their money. Tier 1 bonds have unlimited maturity. The issuer pays interest on the bond only when the bank also pays a dividend.
posted about 1 year ago by Donald from California
