Types of Bonds
By issuers
When necessary, governments or corporations issue bonds to raise funds for development projects. As such, bonds can be classified into government bonds and corporate bonds, i.e. in terms of the respective issuers.
Government bonds are issued by national or regional governments and are usually denominated in local currencies. They are considered relatively safe investments with minimum default risk as governments have the ability to redeem the bonds on maturity, since they can even raise taxes or print money, if necessary.
Corporate bonds are those issued by companies to finance their business expansion or new projects. They carry higher risks than government bonds and thus often pay higher interest to investors.
By credit quality
Credit ratings assigned by independent rating agencies, such as Standard & Poor's (S&P) or Moody's, reflect the creditworthiness and default risk of a company.
Moody's | S&P | |
Investment Grade | Aaa | AAA |
Aa | AA | |
A | A | |
Baa | BBB | |
Non-inverestment Grade | Ba | BB |
B | B | |
Caa | CCC | |
Ca | CC | |
C | C | |
/ | D |
Ratings from AAA to BBB by S&P are considered investment grade and ratings lower are considered non-investment grade. A company with a stronger balance sheet is typically given higher rating since it has a lower chance of default, whereas those in weaker shape financially are rated lower because of the relatively higher risk of default.
When investing in bonds, investors also take the risk premium into consideration. To appeal to potential buyers, non-investment grade bonds tend to offer higher yields compared to investment grade bonds and hence they are also called high yield bonds.