Bond Ratings

Bond Ratings

Bonds are attractive to investors for two reasons. Presuming that the issuer remains solvent, a bond offers a reliable source of income, paying interest on a regular basis until maturity. Second, bondholders can expect to receive the full face value of the bond at maturity. Bonds are perceived as a less risky investment than stocks. But that perception must be tempered by the fact that, because they may be bought and sold prior to maturity, bonds are subject to market fluctuation and may be worth less than the original cost upon redemption. The formula is simple: When interest rates rise, the value of existing bonds falls.

If an investor needs to sell the bond in a rising interest rate environment, he or she may suffer a loss. On the other hand, falling interest rates may boost the value of an existing bond, often allowing an investor to sell the bond at a gain.

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