Are a rated bonds low risk?
What are A+ rated bonds? Bonds with an A+ credit rating are considered a moderately safe investment with a low risk of default.
Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk. Obligations rated B are considered speculative and are subject to high credit risk. Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.
For example, with S&P and Fitch, a rating of AA+ is better than AA, and a rating of AA- is worse than AA but better than A+. Moody's uses numbers to indicate relative quality, with Aa1 being the best Aa rating, followed by Aa2 and Aa3.
Junk bonds.
These bonds have a higher risk of default and are typically issued by companies with weaker financial positions. Junk bonds offer higher yields than investment-grade bonds, but they carry more risk. Ratings are typically BB+/Ba1 and lower.
Credit Ratings
The safest bonds—AAA, AA, A, and BBB—have a one-year probability of default that is less than 0.1 percent. 4 Speculative-grade bonds—BB, B, and CCC—are considerably riskier.
The most reliable (least risky) bonds are rated triple-A (AAA). Highly-rated corporate bonds constitute a reliable source of income for a portfolio. They can help you accumulate money for retirement or save for college or emergency expenses.
High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not.
The highest possible rating that a bond may achieve is AAA, which is only bestowed upon those bonds that exhibit the highest levels of creditworthiness. This AAA rating is used by Fitch Ratings and Standard & Poor's, while Moody's uses a similar Aaa lettering.
A+, A, A- indicates excellent performance. B+, B, B- indicates good performance. C+, C, C- indicates satisfactory performance. D+, D, D- indicates less than satisfactory performance. F indicates unsatisfactory performance (no credit: always include last date of attendance).
Is A+ a good rating?
Both A+ and A1 fall in the middle of the investment-grade category, indicating some but low credit risk. Credit ratings are used by investors to gauge the creditworthiness of issuers, with better credit ratings corresponding to lower interest rates.
A+ (90% and above): Outstanding work that demonstrates independent thought and critical reflection and has an excellent research question as well as systematic and persuasive answers to this question.
Highest credit quality
'AAA' ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
An issuer with a high credit rating will pay a lower interest rate than one with a low credit rating. Again, investors who purchase bonds with low credit ratings can potentially earn higher returns, but they must bear the additional risk of default by the bond issuer.
Default Rates for Global Corporate Bonds
For example, S&P Global reported that the highest one-year default rate for AAA, AA, A, and BBB-rated bonds (investment-grade bonds) were 0%, 0.38%, 0.39%, and 1.02%, respectively.
If the issuer defaults on payment of the bond, the bond price could plummet. If the issuer goes bankrupt (in the case of a company), the bond may become totally worthless, depending on the company's financial situation.
The incidence of default for high quality municipal and corporate bonds is generally very low. 99.97% of all Aaa and Aa rated municipal bonds and 98.96% similarly rated corporate bonds have generated coupon payments and redemptions as promised over the past 40 years without a single missed or even late payment.
Treasury bonds are issued by the federal government, municipal bonds are issued by state and city governments, and corporate bonds are issued by corporations. Treasury bonds are viewed as essentially free from the risk of default because the government can always print more money to meet its obligations.
Holding bond funds for shorter periods than that opens you to the risk of further, short-term gyrations in your fund's value, without sufficient time for recovery. And if you buy longer-term individual bonds and have to sell them, you risk the kinds of losses that investors have been experiencing lately.
Despite Treasuries' recent rally, yields remain very compelling, with the US 10-year Treasury now yielding 3.9%. For bond investors, these conditions are nearly ideal. After all, most of a bond's return over time comes from its yield. And falling yields—which we expect in the latter half of 2024—boost bond prices.
Why do companies get their bonds rated?
Bond rating companies (sometimes called agencies) are for-profit companies (not to be mistaken with government agencies) that assess the creditworthiness of both debt securities and their issuers. These companies provide investors with reliable information on the riskiness of various kinds of debt.
For Fitch Ratings, a triple-A or AAA rating is the highest investment grade and signifies that its debt is an exceptionally low credit risk. A rating of AA+ represents very high credit quality; An "A" means high credit quality, and BBB is a satisfactory credit quality.
The SEC's Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate individual investors about high-yield corporate bonds, also called “junk bonds.” While they generally offer a higher yield than investment-grade bonds, high-yield bonds also carry a higher risk of default.
In general, stocks are riskier than bonds, simply due to the fact that they offer no guaranteed returns to the investor, unlike bonds, which offer fairly reliable returns through coupon payments.
BBB/Baa is the lowest rating that qualifies for commercial bank investments. It's a borderline group for which, in Standard & Poor's words, adverse economic conditions or changing circ*mstances are more likely to lead to a weakened capacity to pay interest and repay principal than for bonds in higher-rated categories.
