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What is AAA Rating Bond?
In order to understand AAA Rating Bond, it is important to under ‘AAA Rating First’.
“AAA is the highest credit rating that any of the major credit rating agencies can give to an issuer’s bonds. AAA-rated bonds have a high credit rating because their issuers are able to meet their financial obligations with ease and have the lowest risk of default.” The letters “AAA” are used by rating agencies Standard & Poor’s (S&P) and Fitch Ratings to identify bonds with the highest credit quality, while Moody’s uses the similar “AAA” to indicate a bond’s top-tier credit rating.
- The highest possible rating of bonds is AAA, which is only given to bonds with the highest levels of creditworthiness.
- AAA rating is actually used by Fitch Ratings and Standard & Poor’s, while Moody’s uses the “AAA” lettering.
- Bonds with AAA ratings are assumed to be the least likely to default.
- Issuers of AAA-rated bonds typically have no trouble finding investors, despite the fact that the yield on these bonds is lower than that of other tiers.
The term “default” refers to a bond issuer’s failure to pay an investor the principal amount and/or interest due. Because AAA-rated bonds are thought to have the lowest risk of default, they typically have the lowest yields among bonds with similar maturity dates.
Companies can also be given AAA ratings. Several companies, including General Electric, lost their AAA ratings as a result of the global credit crisis of 2008. Only Microsoft (MSFT) and Johnson & Johnson (JNJ) had the AAA rating as of 2020. (JNJ).
Important: Investors should consider balancing their fixed income exposure with higher income-producing bonds, such as high-yield corporates, rather than limiting their fixed-income investment (exposure) to AAA-rated bonds.
Types of AAA Bonds
Municipal Bond Types
Municipal bonds are divided into two types: revenue bonds and general obligation bonds, with each type relying on different sources of revenue. Fees and other specific income-generating sources, such as city pools and sporting venues, are used to pay for revenue bonds. General obligation bonds, on the other hand, are backed by the issuer’s ability to raise capital through taxation. State bonds are backed by state income taxes, whereas local school districts are backed by property taxes.
Secured vs. Unsecured Bonds
Both secured and unsecured bonds can be sold by issuers. Each type of bond has a unique risk profile. A secured bond is one for which a specific asset has been pledged as collateral, with the creditor having a claim on the asset if the issuer defaults. Secured bonds can be backed up with tangible assets like machinery, equipment, or real estate. Secured collateralized offerings may have a better credit rating than unsecured bonds issued by the same company.
Unsecured bonds, on the other hand, are simply backed by the issuer’s promised ability to pay, so their credit rating is heavily reliant on the issuer’s income sources.
Benefits of a AAA Rating
A high credit rating lowers an issuer’s borrowing costs. As a result, companies with high credit ratings are more likely to be able to borrow large sums of money than fixed-income instruments with lower credit ratings. A low cost of borrowing also gives businesses a significant competitive advantage by allowing them to easily access credit to expand their operations.
A company might, for example, use the proceeds from a new bond issue to launch a new product line, open a new location, or acquire a competitor. All of these initiatives can help a business grow its market share and thrive over time.
How Triple-A (AAA) Bond Ratings Work
Bond-rating agencies consider a variety of factors to determine how safe a bond is as an investment. These factors include the issuer’s balance sheet strength, the likelihood of sufficient earnings and cash flows to cover the promised interest and principal repayments, and the collateral available to seize if the bond defaults before or on its maturity date.
Obtaining a AAA rating is extremely difficult. Johnson & Johnson and Microsoft Corporation are two American companies that have kept their AAA ratings. 12
The global credit crisis of 2008 resulted in the loss of AAA ratings for companies such as General Electric (GE).