Fixed-Income Ratings

Fixed-income securities are those that pay out a constant stream of income. These are usually bonds. The higher the fixed income security is rated, the more creditworthy the issuer of the security, or the assets underlying the security, are deemed. There are two main issuers of bond ratings within the United States, Moody's and Standard & Poor's.

Ratings and Return

• The higher rated the fixed-income security, the less risky the investment is considered to be. Since there is a positive relationship between risk and return, the higher-rated securities have a lower expected return. This is because investors are willing to accept a lower return for more certainty.

Investment Grade Bonds

• Investment-grade bonds are those that are rated within the higher spectrum of ratings. The upside of acquiring a high investment rating for the bond issuer is that they are able to pay less when raising debt. The upside for the investor is that they assume less risk when buying investment-grade bonds. An example of a company with an investment grade rating is Coca-Cola.

High-Yield Bonds

• High-yield bonds, or junk bonds, are those that receive a rating that falls within the lower spectrum. They are underwritten by companies that are less creditworthy and have a higher probability of defaulting on the bond. The advantage to investors in acquiring high-yield bonds is that they pay the investor a higher rate. An example of a company with a junk-bond rating is General Motors.

Moody's

• Moody's uses a ratings system of bonds that goes from Aaa to C with Aaa being investment grade securities and C being labeled junk bonds. The ratings go down from Aaa to Aa to A to Baa to Ba to B to Caa to C. Anything including Baa and above is considered investment grade. Anything below is considered a high-yield bond.

Standard & Poor's

• Stand & Poor's uses a rating system that goes from AAA to D. The ratings go from AAA to AA to A to BBB to BB to B to CCC to CC to D. Anything including BBB and above is considered investment grade. Anything below BBB is considered a high-yield bond.