For Mark Roberts’ Use: Bonds are a common investment vehicle, but you may be unfamiliar with the ratings system you often see associated with them. Since a bond’s rating tells you a lot about the potential return of your investment, it makes sense to familiarize yourself with the three main ratings systems.
These ratings are determined by credit ratings agencies, which analyze the issuer’s financial condition and creditworthiness. A particular rating indicates the bond issuer’s ability to repay the principal and interest promised to investors. In other words, a high bond rating means that you’re likely to receive the promised payout when your bond matures, and a low rating means that your investment may be subject to more risk.
The three main ratings systems used today are derived from Standard & Poor, Moody’s Investors Service, and Fitch Ratings. Each agency uses a slightly different ratings scale. You might see the following ratings associated with bonds you’re considering. These scores are listed in descending order, from highest to lowest quality, with the lower scores indicating bonds which are more likely to default:
Standard & Poor: AAA, AA+, AA, AA–, A+, A, A–, BBB+, BBB, BBB–, BB+, BB, BB–, B+, B, B–, CCC+, CCC, CCC–, D
Moody’s Investors Service: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C
Fitch Ratings: AAA, AA+, AA, AA–, A+, A, A–, BBB+, BBB, BBB–, BB+, BB, BB–, B+, B, B–, CCC, DDD, DD, D
As is a common principle in investing, bonds with higher risk (lower ratings) often carry a higher yield, whereas bonds with lower risk (higher ratings) often carry a lower yield. Keep in mind that bonds are also subject to interest rates and inflation risks, and maturity terms can vary. Always weigh your risk tolerance carefully to avoid making investment decisions you later regret.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.