Things You'll Need:
- Subscription to one of the major investment rating services
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Step 1
Bonds issued by public companies are usually rated by 1 of the 3 major rating agencies. Ratings are determined by letter grades (with some variation) with AAA (triple A) being the highest rating to C or default. Use the link in Resources to find specific ratings. AA securities are considered high quality securities, ranked above medium securities
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Step 2
Ratings are relative to the asset class. This means that a municipal bond rated A is probably still a better risk than a AA-rated corporate bond. The rating agencies do not divulge their rating classes but generally U.S. Treasury bonds, municipal bonds, foreign debt, corporate securities and fixed income products. There is no exact way of measuring the relative risk of asset classes other than to look at default rates.
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Step 3
Securities that are rated Aa are judged to be the bottom tier of high-quality bonds. They are rated lower than AAA bonds because coverage ratios are not as great as Aaa securities. Default rates are low.
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Step 4
Understand that premium bonds are bonds trading at a price higher than the redemption price which is also called par or 100. A bond purchased at a premium was priced to reflect the fact that the coupon payment is higher than the prevailing rate of interest for that maturity. When the bond is redeemed, you will receive less in principal than you invested. On the other hand, you will have received more coupon income than you would have received with a par bond.
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Step 5
Know that bonds may be subject to redemption before maturity. This is the case if there is a call feature. A call feature allows the investor to redeem bonds at the issuer's discretion. Usually, the issuer redeems bonds so they can reissue the bonds at lower interest rates. Thus the reinvestment risk is greater for premium bonds than it is for lower priced bonds. It is wise not to invest much beyond the date of a bond's call feature. This is particularly true of premium bonds.
