AAA Corporate Bonds - What You Must Know

In spite of the general economic downturn that affected and continues to affect even the largest financial institutions in the world, the corporate bonds are still popular investments for most investors for many reasons. Of course, the most popular investments are still the AAA corporate bonds for the obvious reason that these have the lowest risk for default.

In this article, the nature of these corporate bonds will be discussed. We shall then shed light on the desirability of these AAA-rated corporate bonds and why you should also look into these debt instruments as profitable investments.

Corporate Debts

In essence, corporate bonds are IOUs made by the corporation to the individuals and institutions that purchased the bonds. A debtor-creditor relationship is then born between the corporation and the investors, respectively. Take note that the corporation issuing the bonds may either be a privately-held or a publicly-traded entity.

These AAA corporate bonds are obviously issued by corporations with excellent credit rating provided by credit rating agencies like Moody's and Standard & Poor's. The credit rating is provided based on a set of criteria including but not limited to the corporation's past financial performance, present financial status and future financial direction. You will observe that it all boils down to finances precisely because this is what business is about first and foremost - money.

Why are corporate bonds issued? The main reason is that the corporations can fund their operations, be it for present operations or for future expansions with the primary aim being to fuel corporate growth.

Depending on the corporate requirements, corporate bonds can be issued in denominations ranging from $1,000 to $5,000 with increments starting from $1,000. Interest rates are usually set on the face of the corporate bonds with maturity periods ranging from 6 months to 10 years.

Corporate Rating

So, what makes AAA corporate bonds so desirable? To understand the debt instruments' desirability, we must first discuss what AAA means in the financial world.

Credit rating agencies like Moody's Standard & Poor's and Fitch provide for the credit rating of public and private entities from the federal government to the smallest corporation in the United States. The rating starts at AAA as "High Grade" to D as "Default" with in-between ratings like Baa1 to C. It must be emphasized that each credit rating employs a different alphanumeric rating but these can be categorized from high grade to default.

Why is the rating so important for AAA corporate bonds? You may have heard of the downgrade of the United States' prized AAA rating to AA-plus from Standard & Poor's that can result in higher borrowing costs for the American government, consumers and companies.

Indeed, when a company's rating for its bonds slips down one notch, the investors are almost immediately concerned about the ability of the corporation to pay up. The corporation will then have a harder time convincing investors to purchase its bonds.

The main attraction then of AAA corporate bonds is the almost ironclad guarantee that the issuer will pay up when the maturity period comes up. These corporations have the money to pay their creditors - including yourself, if you bought the bonds - and, thus, everybody will be happy for it.