AAA Credit Rating for Bonds
Credit ratings are one of the most important factors to consider before making any kind of investment in stocks, bonds and other kinds of financial assets. Credit rating is a number that determines the success of the investment. Credit ratings are provided to any kind of financial asset or entity that seeks capital such as borrowers, companies, states or government authorities. Credit ratings are usually provided by credit rating agencies such as Standard & Poor’s, Moody’s and Fitch. Investors looking for credit ratings pay these companies for their services.
Credit ratings are also provided for bonds. It is the first thing a potential investor will hear about once they enter the bonds market. AAA or triple-A is the highest credit rating that any financial asset can earn. AA bonds are the highest rated bonds which have the maximum chance of highest returns on the investment. Credit rating agencies look at various factors and metrics before assigning a AAA rating to a bond. Some of the various parameters considered are
- The bond issuer’s balance sheet
- The possibility of cash flows and profits which will cover the interest
- Principal repayments
- Collateral which will be seized if the bond defaults or matures
Overview of AAA bonds
Triple-A bonds are considered to be the safest bonds in the market. When a credit rating agency assigns a AAA rating to a bond, it is a signal to potential investors that the bond has every chance of giving returns and the chances of the bond defaulting are extremely rare. It is extremely difficult to earn a AAA credit rating. After the financial crash of 2008 and 2009, there were only 500 assets registered in S & P who had a AAA credit rating. The companies that had a AAA rating were
- ADP or Automatic Data Processing- which happens to be a payroll processing giant that helps businesses management payrolls of their employees and documentation related to payment of taxes.
- Johnson & Johnson is a medical, pharmaceutical and consumer goods multinational that owns around 265 other companies.
- Microsoft stood at AAA credit rating and is the world’s largest and most popular software companies in the world. It is famous for being financially conservative in its operations.
- ExxonMobil or the Standard Oil of New Jersey / Standard Oil of New York giant which is descendent of the empire of John D. Rockefeller.
AAA bonds are categorized under a larger label of investment bonds. Investment bonds are any bonds that are rated BBB or above. There are certain financial regulations associated with investment bonds. While the best bonds in the market are sovereign bonds offered by the government, AAA bonds are just a close runner-up. Due to the extremely stable nature of these bonds, they offer the lowest returns. There is a balance between the risks and the yields offered. The price of safety is the returns on investment.
While AAA bonds are the safest bonds on the market, the ones at the bottom of the list are known as D rated bonds. The D rating indicates that the bonds offered have already gone into default. D rated bonds are known as junk bonds. Investors are usually advised to stick to only investment bonds and stay away from junk bonds. It is not wise to play around with high default probabilities. The extremely high-interest rates offered by such junk bonds should be ignored completely as there will be zero returns on the investment if the bond defaults and there is no suitable collateral in place to cover the charges. The only thing the investor will gain is a bankruptcy notification from the issuer