What is AAA rating and how is it useful?

FinanceBanking & FinanceTrading

The bonds are usually rated on their creditworthiness and long-term yield. AAA is such a rating. It is considered the best rating any bond can get and as mentioned, only bonds with a high degree of creditworthiness and yield get this rating.

Businesses also get AAA ratings but the guidelines are too tough. For example, in 2020 only Microsoft and Johnson & Johnson got AAA ratings. The AAA ratings are offered to bonds that are interpreted to achieve the obligations in time. As is obvious, for the same reason, AAA bonds never face a lack of investors' interest.

Creditworthiness and yield are important measures for a company to avoid default which occurs when bonds fail to achieve the obligations they had originally made. AAA bonds have robust creditworthiness and long-term yield meaning that they will never face default in the future.

Since the chances of defaulting are low, investors are always ready to invest in AAA bonds even when the return offered by these bonds is lower than other bonds. Credit rating agencies are responsible for offering the rating and the AAA rating is used by Standard and Poor's (S&P) and Fitch. Moody's on the other hand uses Aaa rating for rating the bonds.

Types of AAA Bonds

Municipal Bonds − There are various types of municipal bonds that are rated AAA by credit rating agencies. Municipal bonds are either revenue-based or general obligation bonds. The revenue-generating bonds are paid using various sources while general obligation ones are related to some obligations. State-sponsored bonds are backed by governments and generate the returns from income taxes paid by citizens.

Secured and Unsecured Bonds

As the name suggests, secured bonds are secured with collateral that can be equipment, machinery, or real estate assets. Secured bonds are more secure than unsecured ones that deal in obligations backed by only promises.

Since unsecured bonds are not backed by assets, investors usually check the performances of the issuer of such bonds and an AAA rating helps investors find the best ones.

Advantages of AAA Rating

AAA rating helps individuals to make an investment decision as the homework is done by the credit rating agencies. They also help investors identify the best bonds in the market. By dealing in AAA-rated bonds one can have peace of mind knowing that there are very few chances of default.

The AAA rating is a gold standard in the world of bonds and they help all investors and stakeholders take the right decision in terms of investment.

Points to Note

  • AAA rating is offered to bonds with the best creditworthiness and long-term yield.

  • Bonds with AAA credit ratings are least susceptible to default.

  • There are three types of bonds - municipal, secured and unsecured depending on the type of assets that back the bonds.

raja
Published on 27-Jul-2021 10:29:12
Advertisements