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AA+/Aa1 — credit rating

AA+ — S&P / Fitch Aa1 — Moody’s Major independent rating institutions such as Moody’s, Fitch, and Standard & Poor’s (S&P) can make or break a company or municipality’s ability to issue debt at a competitive yield. They rank companies and debt issues in terms of the risk of default. Ratings in the A range are considered Investment Grade, which is a rating mostly used by institutional investors. The interesting thing is that there are 7 kinds of A ratings, and they are different between the ratings institutions. We will not list them here, but charts that show the system are readily available online. Continue reading...

A/A2 — credit rating

A — S&P / Fitch A2 — Moody’s Such ratings are given to bond issues and insurance companies, primarily, and this particular one is in the Upper Medium band of the Investment Grade ratings. Investment grade bonds are considered to have a very low possibility of default. The ratings go up to AAA/Aaa and all the way down to DDD/D, with Investment Grade bonds being in the range of AAA/Aaa to BBB-/Baa3. Continue reading...

What does Investment Grade Mean?

Investment grade refers to the highest quality of debt available, and usually means the bond has little risk of default. Determining a bond’s credit rating is typically handled by ratings agencies, which is far from a perfect process. Ratings agencies like Moody’s and S&P notoriously failed to rate mortgage backed securities as high risk in the months/years leading into the 2008 financial crisis, instead keeping them as investment grade even as the crisis took hold. Continue reading...

A+/A1 — credit rating

A+ — S&P / Fitch A1 — Moody’s In the spectrum of ratings given to bonds and companies, A+/A1 is a very good rating to get, even if it is the 5th rating from the top. The Big Three ratings institutions, which are Fitch, Moody’s, and S&P, give ratings for creditworthiness after inspecting the books of companies who issue bonds. There are credit ratings given for companies and credit ratings given to bond issues. Continue reading...

BB/Ba2 — credit rating

BB — S&P / Fitch Ba2 — Moody’s A bond rated BB/Ba2 is just below investment grade and is a somewhat speculative financial instrument. Fitch, Moody’s, and Standard & Poor’s (S&P) are the Big Three major credit ratings institutions. They each have proprietary formulas for assessing the financial strength and creditworthiness of companies, municipalities, insurers, and bond issues, The most common use of these ratings is for bonds, as investors seek to learn how likely it is that a bond will default on its payments. Continue reading...

What is a Callable Bond?

A callable bond, also known as a “redeemable bond,” is one where the issuer has the ability to pay off the debt prior to its maturity date, with certain conditions. Which the issuer has the right to redeem prior to its maturity date, under certain conditions. The primary reason that an issuer would choose to “call” a bond is that interest rates have declined since the bond was issued. By calling the bond, the issuer generally has to opportunity to refinance that debt at a lower rate. Once called, the issuer will notify the creditor and pay off the debt, typically with a slight premium added to close the deal. Continue reading...

What is a Convertible Bond?

A convertible bond, also known as convertible debt, is debt that can be converted to equity (in the form of common stock) at the discretion of the bondholder. There are typically windows that an investor can choose to convert the bond to equity, which an investor may choose to do if they have confidence the company will continue to perform well. Because a convertible bond has the option to convert to stock, it typically offers a lower interest rate since the conversion capability itself has value. Continue reading...

BB+/Ba1 — credit rating

BB+ — S&P / Fitch Ba1 — Moody’s This rating is the highest non-investment grade category that the ratings agencies will give to a bond. When rating bond issues based on their risk of default, investment grade bonds will range from AAA/Aaa to BBB-/Baa3, in the parlance of Fitch, Moody’s and S&P. Below this level, starting with the BB+/Ba1 rating, are High Yield Bonds, also known as Junk Bonds. If an investor chooses wisely, high yield bonds can be some of the best investments in his or her portfolio. The further down the ratings scale a bond appears, the higher the yield; but there is also a higher risk of default. The higher yield paid out on higher-risk bonds is known as the “risk premium,” which is a concept present throughout the investment world. Continue reading...

What is a Bond?

A bond is a contract which “binds” the lender to the debtor, where an individual investor is generally the lender and the debtor is the company or government which has borrowed funds. When a company or government entity needs more capital, whether to fund operations or a specific project, it can borrow money from investors instead of from a banking institution. Where there is a risk of the investor not being repaid, the interest rate will be proportionally higher. The simplest way a bond works is with set payments at set intervals that gradually repay the debt and interest owed to the investor over a set amount of time. Continue reading...

B-/B3 — credit rating

B- — S&P / Fitch B3 — Moody’s In the world of junk bonds, a B3/B- rating is about as low of a rating as most investors will venture to explore. Bonds are rated by independent ratings institutions known as the Big Three: Moody’s, Fitch, and S&P. Two companies, S&P and Fitch, use the same symbols, and the B- in this example belongs to them. Moody’s has its own system, and the B3 in this example is theirs. Continue reading...

What is a Bond Coupon?

A bond coupon is the interest rate that a bond issuer agrees to pay to the bondholder, representing the interest earned from owning the bond. Bond coupons are fixed at the time the bond is issued and remain constant throughout the bond's life. The fixed nature of bond coupons makes them an attractive investment for investors seeking predictable income streams. Continue reading...

What are Envelopes and Trading Bands?

Moving average envelopes and trading bands help traders filter their decisions to trade. These tools set thresholds on the amount of movement above and below a moving average to trigger a decision to trade (or at least prompt further consideration by the trader). A moving average envelope often takes a moving average line for a security or index and duplicates it, moving one line a certain percentage above and one a certain percentage below (the distance may depend on volatility levels). Price fluctuations in a security then might trigger a decision to sell when the price hits the upper band, or a decision buy when the price hits the lower band. If it crosses the bands it might be seen as a new trend. Continue reading...

What is a Bond Ladder?

A bond ladder is a portfolio of bonds that have different maturities, that may range from months to years in difference. A bond ladder is designed to reduce interest rate risk and create predictable income streams. An investor will build a bond ladder often in an effort to reduce interest rate risk and also to create predictable income streams, where coupon payments happen at different times and principal is also returned in various intervals. Continue reading...

What is the Bond Market?

You might not know it, but the Bond Market is about twice the size of the Stock Market. It’s true; in the US and internationally, the bond market, which includes municipal bonds, corporate bonds, government bonds, v, etc, has almost twice the amount invested in it than the Stock Market. Within these categories, there are many subsets. Bonds are widely used by individual investors as well as corporations and governments. Continue reading...

What is an Income Bond?

Income bonds are issued by companies and they will only pay a coupon or interest rate if the company generates adequate earnings to do so. Non-payment of a coupon or interest rate does not necessarily mean that the company is in default. The principal amount plus some interest is due to the bondholder at maturity. Income bonds are sometimes issued by companies who are experiencing hard times and cannot guarantee a coupon payment to bondholders. Continue reading...

What is a Corporate Bond?

A corporate bond is a debt security issued by a public or private company to raise capital. They are generally issued in multiples of $1,000 or $5,000, and the issuing company must agree to pay a certain interest rate typically determined by their creditworthiness and earning history/potential. Often times the corporation issuing the debt must use their physical assets as collateral, and it is often found that corporations are more likely to issue debt during an environment when interest rates are low, so they can borrow at attractive rates. Corporate debt that matures in less than one year is called ‘commercial paper.’ Continue reading...

Who is a Bond Trustee?

A bond trustee is an institution which has the fiduciary responsibility of administering and enforcing the terms of the bond indenture. A bond indenture is the contract between the bond issuer and the bondholder. A trustee has the resources to manage the distribution of the funds to the bondholders, to keep up with and distribute the required bookkeeping and statement information to the interested parties as well as regulators like the SEC. If there is a violation of the contract, the trustee must report it and act in the best interest of the wronged party. Continue reading...

What is Bond Yield?

Bond yield is a measure of the return on investment for bonds, and there several kinds of yield that can be computed. Yield on a bond is the amount of interest that it pays annually, as a percentage of the amount invested — at least, this is the most common type of yield discussed, which is known as Current Yield. If a bond pays quarterly or monthly income to the investor, these payments are totaled up and divided by the amount invested. Continue reading...

What is Bond Insurance?

Bond insurance is a contract that protects the issuer and the holder of bonds from the risk that bond payments will not be made. Bond issues from the corporate or municipal world, or from derivative sources as with asset-backed securities and CDOs, come with the risk of default-- that is, that payments will not be made on time. The major credit ratings agencies (CRAs) assign a risk of default to each bond issue with proprietary analysis methods and ratings. Continue reading...

What are Bond Ratings?

The possibility of a company or municipal government defaulting on their bond obligations, usually by going bankrupt, is a real one. For this reason, all bonds are rated according to the financial stability of the issuer. A look at the history of corporate and municipal debt will illuminate the fact that the possibility of the issuer being unable to pay its obligations to bondholders is a very real one. There is an established system of bond ratings that gives a rough estimate of the bond's reliability. Continue reading...