To ascertain a particular risk profile of a bond it can be marked with a credit rating from various credit rating agencies.
There is a range of credit ratings available for bonds and credit agencies like Standard and Poor’s and Moody’s score a bond from AAA (the best quality) through to D. This is an indicator of the issuer’s ability to pay the interest obligations and principle repayment at maturity. The higher the rating the greater the likelihood that it will meet those obligations and the lower the yield will be.
Any bond with a rating above BBB- is considered investment grade, anything below that are considered nonrated or junk. That’s not to say they are worthless, just that the associated risk is higher and the rating process is costly for the company which places it out of reach for many.
In addition to Corporate Bonds, there are Government Bonds, which usually have the highest credit rating in the country because they are ultimately backed by the Australian Taxpayer.
We currently have the unfortunate situation where the Australian regulation allows the quality score of a Bond to be stated to the wholesale/sophisticated investor only. As a retail client with under $2.5 million in total net assets, you are currently at a disadvantage which makes it challenging to officially find out or research a Bond’s Credit Rating.
One major point however should be remembered – bonds are a much safer investment than shares, regardless of the credit rating. In particular, in times of economic uncertainty, Bonds provide much more stability for investors. Their prices do not fluctuate from minute to minute or even day to day and because the bonds return a fixed rate of interest, the returns are much more stable. You will be able to predict how much you’re going to make next month and even the next couple of years.