Bonds are not the easiest investments to figure out. A bond fund, apart from its description, doesn’t tell you much about all the risks involved either. In an environment where investors chase higher yields, the greater risk of loss can be quickly ignored. Bond ratings make it easy for you to understand the default risk of a bond, while still taking into account all the other risks.

What Are Bond Ratings?

Bond ratings are credit scores for governments and companies. It measures the issuer’s financial strength and ability to make interest and principle payments to bondholders. For investors, these grades are an easy way to do a credit check without digging into financial statements.

The ratings are easy enough to understand. The higher the bond rating, the lower the risk of default. For that, the company gets a lower cost to borrow. For you, it’s a lower interest rate on the bond, but a higher chance you’re paid in full. Continue Reading…