Most bonds are allocated a credit rating to indicate to an investor the likelihood of a subsequent default. The three firms, or 'agencies' that specialise in awarding these ratings, Standard and Poors, Moody's and Fitch do so by looking at a number of factors that could increase or decrease this risk including the credit quality of the issuer, their ability to cover interest payments from profits and any security- usually in the form of assets such as property- on offer. The ratings then vary from AAA 'triple A' for safe, low risk bonds, typically issued by high quality institutions like the UK government and blue-chip companies, down to D for those which have failed to make a coupon payment on time and are therefore in default. Many fund managers are obliged by the regulator to hold 'investment grade' bonds meaning those with a credit rating of BBB and above.
See Tim Bennett's video tutorial: Do we need ratings agencies?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Renters lose confidence in UK housing market as mortgage and rent spending increasesRenters are being squeezed by rising bills, resulting in a loss of confidence in the housing market.
-
State pension gender gap ‘almost closed’ for new retirees – but private gap widensThe state pension amounts for men and women are on course “to be equal very shortly”, says Department for Work and Pensions
