In the case of municipal and corporate bond funds , a fund company's literature, such as its fund prospectus and independent investment research reports, will report an "average credit quality" for the fund's portfolio as a whole.
Investment-grade issuer credit ratings are those rated above BBB- or Baa. The exact ratings depend on the credit rating agency. Companies with any credit rating in this category boast a high capacity to repay their loans; however, those awarded an AAA rating stand at the top of the heap and are deemed to have the highest capacity of all, to repay loans. Many institutional investors have instituted a rigid policy of limiting their bond investments solely to investment-grade issues.
The next category down includes the following ratings:. Companies with these ratings are considered to be stable entities with robust capacities for repaying their financial commitments. However, such companies may encounter challenges during deteriorating economic conditions.
The bottom tier of investment-grade credit ratings delivered by Standard and Poor's include:. Companies with these ratings are widely considered to be "speculative grade" and are even more vulnerable to changing economic conditions than the prior group.
Nevertheless, these companies largely demonstrate the ability to meet their debt payment obligations. According to Moody's, investment-grade bonds comprise the following credit ratings:. The highest-rated Aaa bonds possess the least credit risk of a company's potential failure to repay loans. By contrast, the mid-tier Baa-rated companies may still have speculative elements, presenting high credit risk—especially those companies that paid debt with expected future cash flows, that failed to materialize as projected.
Investors should be aware that an agency downgrade of a company's bonds from "BBB" to "BB" reclassifies its debt from investment grade to "junk" status. Although this is merely a one-step drop in credit rating, the repercussions can be severe.
The drop to junk status telegraphs that a company may struggle to pay its debts. The downgraded status can make it even more difficult for companies to source financing options, causing a downward spiral, as costs of capital increase. Basically, credit rating tiers reveal a company's capacity to repay loans. Forum in focus. Age is just a number: over 50 companies show age-inclusive policies create opportunities and growth.
Read more about this project. Explore context. Explore the latest strategic trends, research and analysis. So what is a credit rating, and why does it matter? Image: World Economic Forum. Image: LearnBonds. License and Republishing. Written by. More on Financial and Monetary Systems View all. US consumer prices are at their highest since Industries to Invest In.
Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. New Ventures. Search Search:. Jun 25, at AM. Measure content performance. Develop and improve products. List of Partners vendors. AAA is the highest possible rating that may be assigned to an issuer's bonds by any of the major credit rating agencies. AAA-rated bonds have a high degree of creditworthiness because their issuers are easily able to meet financial commitments and have the lowest risk of default.
Since AAA-rated bonds are perceived to have the smallest risk of default, these instruments tend to offer investors the lowest yields among bonds with similar maturity dates.
AAA ratings can also be given to companies. The global credit crisis of resulted in a number of companies losing their AAA rating, most notably, General Electric.
Rather than restricting their fixed income exposure to AAA-rated bonds, investors should consider balancing those investments with higher income-producing bonds, such as high-yield corporates.
Municipal bonds can be issued either as revenue bonds or as general obligation bonds—with each type relying on different sources of income. Revenue bonds, for example, are paid using fees and other specific income-generating sources, like city pools and sporting venues.
On the other hand, general obligation bonds are backed by the issuer's ability to raise capital through levying taxes. Pointedly: State bonds rely on state income taxes, while local school districts depend on property taxes. Issuers can sell both secured and unsecured bonds. Each type of bond carries with it a different risk profile. A secured bond means that a specific asset is pledged as collateral for the bond, and the creditor has a claim on the asset if the issuer defaults.
Secured bonds may be collateralized with tangible items such as equipment, machinery, or real estate.
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