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
-
How you could boost household income by £16k tax-free – five legal loopholesKnowing your way around the tax system means you can take advantages of ways to keep more of your income tax-free
-
HSBC UK slashes financial advice fee to 1% for Premier customers – how does it compare to other £100k accounts?Natwest and Lloyds offer competing accounts with a range of perks from cheaper mortgages to cashback to entice those with £100,000 or more in savings and investments. Is HSBC’s reduced fee worth considering?
