Grading the Risks
Grading the Risks
Being able to assess the risk in any particular corporate bond issue is therefore a vital part in deciding whether it both fits with your own attitude to risk and that the interest rate you are being offered for your money is worth the potential downside. As you might expect, the higher the risk that you might lose money, the higher the interest rate a company will have to pay to persuade you to part with it. The lower the risk involved, the more people will be prepared to lend and therefore the lower the interest rate that company will have to promise in return.
To help with this process, two main agencies – Standard & Poor’s and Moody’s – offer a ratings service. This helps the company see how the market might view the risks in their issue and also gives the market a scale against which to measure an individual issue. This helps everyone assess the relative attractiveness of the issue and of the interest rate being offered.
Both companies use slightly different gradings but in essence, bonds rated AAA/aaa – BBB/Baa1 are considered ‘investment grade’ and those rated below BBB/Baa1 are called non-investment grade or ‘high yield’. Once you get down to ratings of CCC and below, the companies are considered vulnerable, highly vulnerable or may even have already filed for bankruptcy, and the bond issues in this areas can colloquially be referred to as ‘junk’. In other words, you will be very lucky if you get paid what is promised and should only even consider such an low grade investment if you are highly experienced AND can afford to lose some or all of your money when the expected happens.
Past performance is no guide to the future. The value of investments can go down as well as up and you may get back less than you invested.
When investing internationally changes in currency exchange rates may affect the value of an investment. Smaller companies and emerging markets carry higher level of risk than larger, more established companies and markets. Consequently, the suitability of any particular stock market investment depends on your personal circumstances and your attitude to risk.
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