How to Avoid Defaulting Bonds

Investment bonds are an excellent source of stability and revenue to add to an investment portfolio. To gain the benefits of investment bonds, do a little homework. Bonds are rated based on the ability of the source to return the value and interest to the purchasers. Review the guidelines of the leading bond rating services to avoid defaulting bonds and retain the value of the bond investment.

Instructions

Difficulty: Moderate

1. Compare the desired bond against the Standard and Poor's ranking system, commonly known as the S&P. The S&P bases it's ranking on credit worthiness and volatility, each characteristic speaking to rate of default by the bond issuer. Credit worthiness rates the bonds on a scale from AAA at the low probability of default to CCC at the high risk of default.
2. Measure the bond against the Moody's Investors Service. Moody's has a tool called the Quantitative Ratings Estimator. Its ratings are based on the "industry, asset class, and issuer" to determine the probability to default (PD). These predictions are derived from data that appears complex to the naked eye, but can be broken down into rating: Aaa to Baa3, low to high PD.
3. Get familiar with the S&P and Moody's Investors Service to evaluate the stability, credit worthiness and volatility to avoid defaulting bonds easily. Look at each rating grade to identify the rankings quickly. Follow the rankings to identify defaulting bonds, avoid them and improve the risk for bond purchasers.

Tips & Warnings

• If you are still uncomfortable with determining the probability of defaulting bonds, contact a flat fee Financial Consultant. Get a consultant who is informative and avoid those focused on selling a specific product.
• Moody's Investors Service website requires users to establish a user name and password to access the information on the site.
• Bond ratings can change throughout the cycle of the investment, so keep an eye out on how the bond is rated periodically.
• Both the S&P and Moody's Investors Service have ratings for bonds at higher probabilities of default, but those should be reserved for speculators. The return is greater, but not worth the risk for investors who want to avoid defaulting bonds.