When you start to consider investing in bonds, you’ll soon come across the term bond ratings. In order to help investors determine the most appropriate bond to invest in, a series of ratings have been developed by some well-known industry companies. These ratings are designed to provide the investor with the risk rating profile of the bonds offered in the market. One of the most common has been developed by Standard and Poor’s and is widely mentioned in the financial industry. The descriptions below are based on Standards and Poor’s ratings.
The grading scale is based on levels A through D, and there are multiple grades within each level. The highest rating is triple A, these are considered the safest and least risky investments. The other levels are double A and A, double A is a very safe investment and A is safe but could be affected if economic conditions change for the worse. Tier B consists of triple B, double B, and B. Triple B is the highest of this tier and should provide adequate protection for your investment, but that protection is less than Tier A ratings. Double B and B bonds , respectively, are not as safe as triple B bonds and slightly better than tier C bonds. Investment in double B and B bonds is a speculative investment and the risk known to be associated with speculative investment should be considered. The risks are that the organization’s ability to repay the bonus may be affected by the organization’s exposure to business and economic downturns in the trade.
Tier C bonds are much more speculative than Tier B bonds, so your risk exposure is increased significantly. Level D is awarded when an organization has already defaulted on payments to existing investors. This qualification can also mean that there is an active bankruptcy petition, which goes without saying that it is an extremely risky investment to consider undertaking. The use of plus (+) or minus (-) applies to double-A to triple-C bond ratings, to better define these rating levels. It interprets them as the plus is slightly higher meaning less risk and the minus is slightly lower with more risk. There are times when bonuses do not have a rating applied to them, this will be identified by an NR (no rating) for the actual bonus.