The risk of default (whether you will get paid back or not) on bonds varies from issuer to issuer – for example, the US government is more likely to repay than the Argentinian ministry of finance, and a multinational conglomerate is safer than a small company.
Credit-rating agencies grade bonds to help you gauge their risks.The three biggest agencies are Moody’s, Standard & Poor’s (S&P) and Fitch IBCA. They use broadly the same system of classifying bonds, the safest being AAA (or Aaa with Moody’s), the next being AA+ (Aa1 with Moody’s) and so on down to the bottom end of the spectrum, where CCC-listed bonds are deemed to be at a substantial risk of default, and D-listings, where the issuer has already defaulted.
Bonds at the bottom end of the scale are known as ‘junk bonds’ and offer a higher yield than those with higher ratings, but they are a lot more risky to invest in.
• See Tim Bennett’s video tutorial: Do we need ratings agencies?