Provided by Joseph V. Curatolo
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.
Joseph V. Curatolo is president of Georgetown Capital Group, 5350 Main St., Williamsville (phone: 633-9800, toll-free 1 (800) 648-8091, fax 633-9789, www.georgetowncapital.com).
Insurance services offered by Georgetown Capital Group, which is independent of Royal Alliance Associates, Inc., with separate ownership, and is not registered as a broker-dealer or investment advisor.
This message may contain confidential information and is intended for use only by the addressee(s) named on this transmission.
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.
This communication is strictly intended for individuals residing in the state(s) of AL, AZ, AR, CA, CO, CT, DE, FL, GA, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MO, NV, NH, NJ, NY, NC, OH, OR, PA, SC, SD, TX, VA, WA and WI. No offers may be made or accepted from any resident outside the specific states referenced.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.