Bonds are important records provided by governments and companies to raise money. They pay a fixed amount of annual interest, known as the nominal interest rate, which is one percent of the nominal amount of the bond in particular. Because bonds are sold in the free market, prices are changing in response to market forces. Because investors are buying bonds for the income they make, interest rates have the greatest impact on their prices. However, their ratings are an important consideration, because they estimate the risk and have a large impact on the prices of bonds.
Each bond has a period of maturity, in which the issuer should withdraw the bond that pays the holder its nominal value. However, most bonds carry at least some risk of default, which means there is a possibility that the company or government agency can not repay the debt represented by the bond. This is a rare event with some kind of bonds but more likely to others. If the bond has a term for many years in the future, the issuer’s financial status may change throughout that period. Bonds are classified by the risk of default they show based on the financial situation of the issuer.
Treasury bonds and other bonds issued by the federal government are considered to be virtually non-risk default and not rated for bond rating services. The municipality (also called “munis”) is provided by the state or local governments. In general, these are safe investments. However, it is sometimes observed that a government agency has financial problems, especially during the economic crisis. Failure to pay municipal bonds is rare, but this will happen. Corporations are provided by private companies. Some have a very high rating and are considered safe, while others may show a serious risk of default and as a result is low.
Companies are classified according to default or credit risk as individuals. There are three main services: Standard u0026 Poor’s, Fitches Ratings and Moody’s. They examine income prospects and the overall financial situation of the issuers of municipal and corporate bonds and publish their evaluations in the form of their rating. The safest is AAA, AAA or AA ratings. The next bonds are rated A or BBB (Moody uses Baa’s dedication). Bonds with a lower rating are not considered to be an investment grade. The lowest rate bond is those where the issuer is bankrupt, by default or can not make interest payments. These are called C or D (see References 1).
Ratings and prices
Bond payment services offer invaluable guidance for investors in making easy-to-reach risk estimates They also have a great influence on bond prices. If this rating is reduced, the bond price usually falls in response because investors do not want to buy higher risk securities, at least the prevailing price. However, bonds pay a fixed interest rate. When the price of the bond falls, it means that an investor pays less to get the same amount of interest income, so the increase (effective interest rate) increases. Increasing yields are becoming more attractive to investors who want to receive higher risk in exchange for higher income.