Triple-A (AAA) bond ratings are the highest possible rating assigned to issuer’s bonds by credit rating agencies. These bonds have high creditworthiness and a lower risk of defaults. Therefore, these bonds can easily meet financial commitments.
Bond Funds Risk Ratings
The major risk involved while investing in bonds is the credit risk or the chance that the issuer will default on its obligation to the investor. Therefore, investors should assess the risk by researching the bond issuing entity. It will help to determine the creditworthiness of the bond.
Note: Bonds are similar to loans. As there are agencies to check up on the credit score of the borrower, similarly, there are agencies that evaluate the bond issuer.
Three major agencies, that evaluate the bond issuer and rate them.
- Standard and Poor’s (commonly known as S&P)
There are several factors that these agencies consider while assigning the bond ratings.
- Nature of issuer’s debt
- Reliability of the cashflow
- Ability to make payments
- Entity management
Triple-A (AAA) is the highest rating that a bond can receive.
Bond Rating Chart
|AAA||Aaa||AAA||Best Quality||Lowest Risk|
|High Quality||Low Risk|
|Upper Medium Grade||Low Risk|
|Investment Grade||Medium Risk|
How Triple-A Bonds Are Rated?
The bond rating agencies consider many different matrices to determine the safety of the bond investment. These matrices include:
- A balance sheet of the bond issuer
- Earnings and cash flow to cover the repayments
- Collateral to seize in case of bond default before the maturity
However, very few companies are capable to achieve Triple-A bond ratings. As of September 2021, Microsoft (MSFT) and Johnson & Johnson (JNJ) have Triple-A ratings.
Risk in Triple A(AAA) Bonds
Since the triple-A bonds have very low risk, the return on these bonds is much lower than any other rated bonds. Whereas, low rated bonds are often high returning but, there is a higher risk of bond default. When a bond issuer fails to repay the Principal/Interest amount to the investor, it is termed as ‘default’.
Types of Triple-AAA Bond Funds
Bonds that are issued by the state or municipality to finance the capital expenditure, including highways, bridges and schools are Municipal bonds. These are debt security bonds and are similar to loans that investors make to the local government. These bonds are commonly known as Muni Bonds or Muni.
Municipal bonds can either be revenue bonds or general obligation bonds.
Revenue bonds: As clear by the name, revenue bonds are repaid using fees and other income-generating sources. Examples of such bonds are sports venues, road constructions etc.
General obligation bonds: These bonds are a type of municipal bonds that are issued by the government, state, local government, cities and other districts. But these bonds do not have revenue sources. Rather, they are supported by full faith in the credit of the issuing entity. These bonds rely on state income taxes for repayments.
Secured and Unsecured bonds
The issuer can sell both secured and unsecured brands. These bonds have a different risk profile. As secured bonds emphasise that a particular asset is promised as security for the brand. The lender can claim assets if the issuer defaults.
Secured bonds are generally collateralized with tangible terms such as equipment, machinery, real estate, etc. Secured collateralized contributors might have a higher credit score than unsecured bonds and are sold by the same issuer.
Whereas unsecured bonds are backed by the issuer’s promised capacity to pay. And, so the credit score for these bonds relies on the issuer’s income source.