Bonds are not just issued by the government but also by firms. Bonds issued by firms can fall into two categories depending on the risk of investing in that company.
Well established, blue chip companies are likely to receive a rating of ‘investment bond’ This means there is little likelyhood of the firm defaulting and giving the investor a guaranteed investment.
Junk bonds are a term given to bonds where there is no guarantee of repayment. This will apply to new firms or risky business investments such as biotech companies.
By giving ratings to various bond markets, investors are able to make better decision about which bonds to invest in. For example, junk bonds will invariably need to offer a better interest rate to compensate for the increased risk.
- Who rates the credit rating agencies?