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Ratings of Debt Obligations
|Definition |Standard & Poor's Ratings |Moody's Investor |Fitch IBCA, |Duff & Phelps Rating |Thomson BankWatch, Inc. |
| |Group |Services |Inc. |Co. | |
|Investment Grade |
|Highest quality |AAA |Aaa |AAA |AAA |AAA |
|High quality |AA |Aa |AA |AA |AA |
|Upper medium grade |A |A |A |A |A |
|Medium grade |BBB |Baa |BBB |BBB |BBB |
|Non-Investment Grade |
|Low grade |BB |Ba |BB |BB |BB |
|Speculative |B |B |B |B |B |
|Submarginal |CCC, CC, C |Caa, Ca |CCC, CC, C |CCC |CCC, CC |
|Probably in default |D |C |DDD, DD, D |DD |D |
Types of Bond Funds
A bond mutual fund can be a versatile investment – either serving as a short-term investment for a purchase in the near future, or as a balance to a portfolio meant for retirement or other long-term goals. Depending on your risk tolerance and time frame, there are a variety of investments to choose from.
Corporate Bond Funds seek a higher level of income by investing primarily in investment-grade corporate bonds. These funds may also invest assets in other types of fixed income securities, such as U.S. government securities and mortgage-backed issues.
Government Bond Funds seek income by investing in government securities such as Treasury bonds and government agency obligations. Although these bonds are government-issued and highly rated, the funds are not insured or guaranteed by the U.S. government.
Municipal Bond Funds seek federally tax-exempt income by investing in bonds issued by state and local authorities. Income from these Funds may be subject to state and local taxes and, depending on your tax status, the Alternative Minimum Tax. However, the tax benefits may still be useful to some shareholders. To discover how a taxable and tax-free yield compare, use the following formula: taxable equivalent yield = tax-free yield/(1 - your tax rate).
High-Yield Bond Funds seek a higher level of income than other bond investments. These funds will invest primarily in non-investment grade corporate bonds and generally entail a higher degree of risk. Due to the greater amount of share price volatility in these funds, investors should look to them as long-term investments of at least four years.
Some bond funds may blend the different approaches listed above – for example, high-yield municipal bond funds. With all of the different types of mutual funds available to you, how do you know which one will provide the right fit?
Know Your Risk Tolerance
The higher the level of income you want to pursue, the greater the risk involved. You should probably be prepared to tolerate an increased level of share price fluctuation, and keep in mind that more aggressive funds may be more suitable for longer term investments.
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