Bond Ratings
Moody’s Investor Services is in the news for threatening to lower the bond rating on U.S. debt to something other than AAA (or Aaa, as Moody’s designates it). Moody’s and Standard & Poor’s (S&P) are the two most well known credit rating agencies, and bond ratings refer to the estimated risk of a debt issue.
AAA is considered the safest and least risky valuation. Along with the safety comes lower rates. In other words, if an individual wants to lend money to the U.S. (through the purchase of some kind of Treasury bond or other investment vehicle), the individual is willing to accept a lower interest payment (rate of return) in exchange for the safety of unlikely default.
A lower rating for the U.S. would mean a higher cost of borrowing for the country – possibly good for the guy investing in T-bills, but not so good for taxpayers (read: all of us) since the country’s debt suddenly comes at a greater cost. Think of it like you are managing your credit card debt one month at a time only to get a notice that your interest rate is going to rise because you have become a greater liability.
Different rating agencies using different letter and number designations to mean the same thing, but in general, AAA is the best, AA next, etc. until BBB (or Baa from Moody’s) kicks in. The lower the letter, the more speculative the debt. In exchange for that higher default risk is typically a higher return. High risk? High reward.
Bonus note: anything rated below BBB is considered to be a “junk bond,” but that doesn’t necessarily mean it’s a bad investment – just that it’s a highly speculative one.
Read on:
BondPickers.com – Bond Ratings Explained
Wikipedia.org – Bond credit rating
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Leave a comment