What's Your Grade?

What is the grade of your bond and how does that affect your investment?  The grade is an indicator of a bond's credit quality.  Just like how individuals have a FICO score for credit card companies to check the quality of a person, the grade of a bond is a way for you to check the quality of an institution's ability to pay back debt.  Standard & Poor's and Moody's are the two big names in the credit rating scene.  You can see from the handy chart that the more A's the better, kind of like in school.  The speculative and highly speculative ranges are known as the junk bond ratings where you are essentially taking a bet on getting your money back, but you will definitely get a larger return than from higher rated bonds.

These ratings are based on the issuer's financial condition.  However, it is important to remember that it is only one factor going into your decision to invest in a particular bond.  Some other factors to consider is the yield on the bond, whether or not it pays a coupon, if it is tax-exempt, or if payments are inflation adjusted.  The bond rating is useful for a quick check but as always, you should always do thorough research on the securities you are looking to purchase.  I may come back to discuss more about bonds, but hopefully the next few posts will look more at stocks.