What You Need to Know About Bond Ratings?

Answer 1

Before you make any type of financial investment, it is important to understand the risks and potential or guaranteed return on the investment. Bonds are popular investments, but many investors do not fully understand what they are or how to determine the risk of a bond. With a closer look at what bonds are and how bond ratings can be analyzed, you can more successfully profit from an investment in bonds.

What Are Bonds?

Before you spend too much time worrying about bond ratings, it is important to understand what bonds are. These are investment options that essentially allow you to lend money to companies, a municipality or even the federal government. For example, bonds may be issued to a company that needs extra capital for expansion, or the government may issue a bond for citywide improvements. Investors typically need to hold onto a bond until the maturity date is reached to enjoy the maximum return.

The Risk of Investing in Bonds

If you are thinking about investing in bonds, you may have heard that these are relatively risk-free investments. Bonds are often placed in the same low-risk category as CDs. However, you should be aware that the risk associated with bonds as an investment relates to the bond ratings. Each bond has received a rating from a reputable financial analysis firm, and the ratings can help you to determine how risky a specific bond is. AAA bond ratings are considered to be among the strongest or safest options, but even investments down to a BBB- rating are still investor grade ratings. Lower bond ratings, such as those as low as C or D are considered to be week and very risky. While bonds with a lower rating may be riskier investments, they also may provide a higher yield for the investor.

Many financial advisors recommend that investors diversify their portfolio with a solid mix of stocks, CDs, bonds and other assets. The relatively low risk associated with many bonds is an ideal counter to the higher risk investments such as stocks. Before you invest in bonds, however, take time to analyze bond ratings in relation to the potential yield.