Question

Explain the reasons for bond ratings and how prices of bonds may be affected. Are bonds good investments?

Answer 1

Bonds are issued by the issuer in order to raise money from the public. In return for the investors money, the issuer pays interest payments and pays back the principal amount of the bond to the investor with interest.

Now, the bonds are assigned ratings by the credit rating agencies, these agencies assign ratings to the bonds which determine the quality of then bond and the probability of default.

The ratings are categorised as "Investment grade and junk bonds" . The junk bond shave a high probability of default, but investors in these bond the investors gets a high yield for investing.

So, the high grade/investment  bonds are the most expensive bonds and they offer a low yield. The prices of the investment grade bonds are higher as they are pf superior quality and the prices of the junk bonds are lower. So, this is how ratings affect the prices of the bond.

Bonds that are issued by the government are backed by the full faith and credit of the government. These are safe instruments and are guaranteed to be paid back at the end of the maturity of the bonds.Yes , bond are good investment for the risk averse investors as they are relatively safe than the stocks but offer a lower rate of return.