Bond ratings are an essential tool when considering fixed-income investments. Ratings provide a professional assessment of credit risk, or the risk of default, which can be measured to some degree by analyzing the bond issuer’s financial condition and creditworthiness.
Credit rating agencies perform this type of analysis and issue ratings that reflect the agency’s assessment of the bond issuer’s ability to meet the promised interest payments and return the principal upon maturity. The best-known independent rating agencies — Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings — use similar scales in descending alphabetical order, ranging from AAA/Aaa for the most creditworthy bonds to C/D for the least creditworthy.
Bonds rated BBB/Baa or higher are considered “investment grade.” Lower-rated bonds commonly called “junk bonds,” are non-investment grade; they generally offer higher yields and are considered speculative with higher credit risks. Bond insurance can add a layer of protection, but it is only as good as the insurer’s credit quality and ability to pay.
A credit rating is not a recommendation to purchase a bond. Even so, higher-rated bonds, in general, may be more appealing to investors, and — due to supply and demand — typically have a lower yield than similar bonds with a lower rating. Investors must balance risk and reward when choosing bonds that present a comfortable risk while providing a yield that is appropriate to help meet investment goals.
Ratings are very important to a bond issuer when the bond is first offered for sale, because a higher rating may reduce interest costs. After the initial sale, significant shifts in the issuer’s financial condition could result in rating changes that may affect the bond’s yield and market value. However, as long as the issuer does not default, a change in a bond’s rating would not affect the coupon rate or the principal due upon maturity.
Bonds carry other risks as well, such as market risk, interest rate risk, and inflation risk. However, these depend on factors that are difficult to measure or predict.
The principal value of bonds fluctuates with changes in market conditions. A bond sold prior to maturity may be worth more or less than its original value.
About 360 Financial Group
360 Financial Group, founded in 1990, provides a holistic approach to comprehensive wealth management as well as tax and accounting and investment management services. At 360 Financial Group, our MISSION is to be our clients’ primary advisor. We believe our knowledge, experience, and intuitive approach to tax and financial planning gives our clients the confidence they need to help them realize their dreams.
Registered Representative, Securities Offered Through Cambridge Investment Research. Inc., a Registered Broker-Dealer, Member FINRA, SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Small Business Group, Inc. and Cambridge are not affiliated.
About Cambridge
Cambridge Investment Group, Inc. is a privately-controlled firm with a national reach across the financial services industry consisting of multiple broker-dealers and RIAs, including Cambridge Investment Research Advisors, Inc. – a large corporate RIA; and Continuity Partners Group, LLC – a special purpose broker-dealer and registered investment advisor; and Cambridge Investment Research, Inc. – an independent broker-dealer, member FINRA/SIPC, that is among the largest privately-controlled independent broker-dealers in the country supporting approximately 3,000 independent financial professionals nationwide who serve their clients as registered representatives and investment advisor representatives, choosing to use either Cambridge’s firm Registered Investment Adviser or their own. For more information visit www.joincambridge.com.
IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.
