If you missed Part 7, please click the link below before moving on.
http://brokermakesyoubroker.blogspot.com/2015/04/part-7-where-do-i-invest-for-best-deal.html
Look at this bond:
Security ID
"085789AE5"
Security Description Maturity Date
"BERRY PETE CO SR NT6.75000% 11/01/2020"
Moody's/S&P Rating Recent Price
"B1/BB-" "$79.00000"
Let's start with a few definition of how to read bond quotes.
Security ID = The SYMBOL ID is another unique identifies used to represent a particular security listed on an exchange or traded publicly. Commonly used for trading, market data, and other places. All listed securities have unique ticker symbol.
Security Description and Maturity Date = make up the name of the bond security. This is the Berry Pete Co., Senior Note, 6.75% that matures on November 1, 2020. The bond usually gives $1,000 on that day. the bond also gives 6.75% interest of $1,000 usually broken up giving one half of $67.50, every 6 months.
Moody's/S&P Rating = That is the rating of the bond by Moody's and "Standard's and Poor's." We will talk about ratings later.
Recent Price = This is the price of a bond. In the example above $79.00 times 10 = $790.00. That is the price bought or sold on the exchanges. Any bond sold below $1,000 is sold at a discount. If the bond sold for $1,290 that is above par or $1,000. That is known as selling at a premium. A bond sold or bought at $1,000 is called sold or bought at par.
BONDS
Bonds are debts to the issuers, whereas they are investments to buyers. Such debts appear on balance sheets of the issuing entities as long-term liabilities. Bonds provide a source of funds for the issuer and a payment to the buyer in the form of interest. As we read in the last blog, Part 7, both bonds and stocks are referred to as securities, yet the two are different types of investments.Credit ratings:
As a credit-rating agency (CRA), the company issues credit ratings for the debt of public and private companies, and other public borrowers such as governments and governmental entities. It is one of several CRAs that have been designated a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission.
S&P issues both short-term and long-term credit ratings. Below is a partial list; see S&P's website for more information.
Long-term credit ratings
The company rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB-). For some borrowers, the company may also offer guidance (termed a "credit watch") as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).
Standard and Poor's Ratings
Investment Grade
- AAA: An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments. 'AAA' is the highest issuer credit rating assigned by Standard & Poor's.
- AA: An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree. Includes:
- AA+: equivalent to Moody's Aa1 (high quality, with very low credit risk, but susceptibility to long-term risks appears somewhat greater)
- AA: equivalent to Aa2
- AA-: equivalent to Aa3
- A: An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
- A+: equivalent to A1
- A: equivalent to A2
- BBB: An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
- BB: An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments.
- B: An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.
- CCC: An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.
- CC: An obligor rated 'CC' is currently highly vulnerable.
- C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
- R: An obligor rated 'R' is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others.
- SD: has selectively defaulted on some obligations
- D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations
- NR: not rated
| Moody's credit ratings | ||
|---|---|---|
| Investment grade | ||
| Rating | Long-term ratings | Short-term ratings |
| Aaa | Rated as the highest quality and lowest credit risk. | Prime-1 Best ability to repay short-term debt |
| Aa1 | Rated as high quality and very low credit risk. | |
| Aa2 | ||
| Aa3 | ||
| A1 | Rated as upper-medium grade and low credit risk. | |
| A2 | Prime-1/Prime-2 Best ability or high ability to repay short term debt | |
| A3 | ||
| Baa1 | Rated as medium grade, with some speculative elements and moderate credit risk. | Prime-2 High ability to repay short term debt |
| Baa2 | Prime-2/Prime-3 High ability or acceptable ability to repay short term debt | |
| Baa3 | Prime-3 Acceptable ability to repay short term debt | |
| Speculative grade | ||
| Rating | Long-term ratings | Short-term ratings |
|---|---|---|
| Ba1 | Judged to have speculative elements and a significant credit risk. | Not Prime Do not fall within any of the prime categories |
| Ba2 | ||
| Ba3 | ||
| B1 | Judged as being speculative and a high credit risk. | |
| B2 | ||
| B3 | ||
| Caa1 | Rated as poor quality and very high credit risk. | |
| Caa2 | ||
| Caa3 | ||
| Ca | Judged to be highly speculative and with likelihood of being near or in default, but some possibility of recovering principal and interest. | |
| C | Rated as the lowest quality, usually in default and low likelihood of recovering principal or interest. |
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My Book; Building Wealth with Corporate Bonds
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I told you many times about my last book published in 2003 called, "Building Wealth with Corporate Bonds." The price is $35.00. I am selling off my final copies of this book. After that, I do not plan to produce anymore. Some of the topics enclosed are:
- Creating a Risk Policy
- Bull and Bear Markets
- What are Stocks and Bonds
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Building Wealth with Corporate Bonds
I/O Darnell L Williams
200 A Seneca Way
Havre de Grace, MD. 21078
I only have a limited amount of copies so order yours today. When they are gone, they are gone.
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