Are You Monitoring the Ratings of Your Bonds?

file0001539596844When an individual purchases a bond, one of the factors they consider is the current bond rating. Standard & Poor’s (S&P) is one of the major independent rating agencies that helps to determine bond ratings. It looks at the issuer of a bond to see if they have the financial strength to pay back the bond and the interest as noted in the bond indenture.

If the bond rating is good, this means the company is strong enough to pay its obligations, which include expenses, payments on debts, and dividends. The highest rating issued by S&P is AAA. The grades AAA, AA,  A, BBB+, BBB  to BBB- are considered “investment grade” or of high quality. Grades BB+ to D are considered to be of greater risk.  The risk increases with the lower of the grade.

While the rating is a top consideration at the purchase of a bond, many individuals never give it a second thought once the purchase is made. However, just because the bond is of good quality at purchase does not mean it will stay that way.  Case in point is the current state of many bonds in the Energy Sector.  While many of them were highly rated in the past, several have fallen to junk status and no longer have value.  Bond downgrades usually happen gradually in steps but that is not always the case now.  We have seen dramatic downgrades with a corresponding drop in the bond price recently.  So then, the question of what to do with that bond becomes paramount. Do you sell it off immediately and take the hit on the price or do you hold the bond taking the risk that the bond may fall further and not get paid the full maturity price of the bond?  The answer to that depends on many variables and you must take the time to understand the causes of the downgrades, the seriousness of the financial situation of the company, and the economic outlook of the industry it is in.

Most people don’t have the time to devote to this process or the knowledge to make the best choice so it is important to team up with someone who knows the market, can monitor the changes in the bond market and take the time to truly understand the situation. If a bond’s rating starts to fall, they can help you adjust your investment mix so that you do not end up holding a bond that is valueless.  For more information in monitoring bond statuses, contact the team at Financial Fiduciaries.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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