Bond Rating

Corporate and government bonds are generally considered a safe form of investment compared to shares, in the sense that you are 'guaranteed' to get repayment of the principal and interest payments. But the value of the 'guarantee' depends substantially on who has issued the bond - a financially healthy issuer, or one that is struggling to meet its borrowing obligations.

Credit rating agencies like Moody's and Standard & Poor's (S&P) and Fitch IBCA provide a service to the investment community by grading bonds according to how likely it is that the issuer will default either on interest or capital payments.

• For S&P the ratings vary from AAA (the most secure) to D which means the issuer is already in default.
• For Moody's the ratings go from Aaa to D.

Only bonds with a rating of BBB or better are considered 'investment grade' - that is, secure enough for institutions to invest in. Anything below that grade is 'non-investment grade' or 'junk'.

The ratings which S&P and Moody's give a bond are continually checked and revised in the light of new research done by those firms. When a bond is downgraded it is a serious event for the issuer because it makes it harder (or more expensive) to raise new borrowings, but it is also bad news for holders of the bonds, because the market invariably marks down the value of the bond.