What Are the Types of Investment Bonds?

Investment grade bonds can be purchased individually or through the purchase of open and closed end bond funds. In either case, the bonds will be rated by one of the major rating services with either an investment grade rating, a junk yield rating, or a bankruptcy rating. Investment grade merely implies that there is a reasonable level of safety in the revenues of the company invested equal to cover the interest and principal payments.

Consider the Risk/Reward Ratio of Investment Bonds

Bonds are rated according to their ability to pay principal and interest. The greater the ability to pay interest and principal the higher the investment grade rating and the lower the yield of the bond. Investment grade bonds do not eliminate interest rate risk. That is a separate and distinct risk that all bonds face.

Investment Grade Ratings

Investment grade ratings come from three main rating services. Moody's, Fitch, and Standard and Poor all provide investment research and at the expense of the issuer ratings. There are private rating services that also provide ratings for stocks and bonds of a particular sector such as for banks and insurance companies. Ratings for investment grade securities generally run from AAA (the highest ratings) to Baa1 (lowest investment grade).

Types of Domestic Investment Grade Bonds

Investment grade bonds can be found in both international and domestic markets. In the United States investment grade bonds may be issued by municipalities and states as tax exempt bonds, corporate bonds issued by corporations and guaranteed by the company, specific assets, or a particular financing. Non profit agencies and special agencies of the United States also issue bonds such as the Federal National Mortgage Association or the Federal Home Loan Bank Board.

Types of International Investment Grade Bonds

Sovereign debt is the issuance of debt by a particular country. It is often debt secured only by the full faith and credit of a company. Ratings vary among nations though most developed countries have investment grade ratings on their debt. Depending on the type of issuance the investor might find a strong investment grade bond issued in a weak currency. As a result the investor will assume additional interest rate and currency rate risk as well as investment grade risk.

Investment Grade Bonds Vary by Risk Category

It is important to understand that a AA corporate bond rating is much riskier than a AA municipal bond rating. This is because the sectors that investment grade ratings are given are not comparable though both AA ratings are investment grade. Municipal bonds have lower default rates than corporate bonds. Corporate bonds have better default rates than sovereign debt. The point is that the term investment grade is relative. Because the United States has never defaulted on debt it is considered the highest of all investment grade bonds.

References

• Types of Bonds
• Bond Rating Agencies

Resources

• Investing in Bonds