Bond Default Risk
The major purpose of bonds is to generate income and balance the volatility of stocks. Even though they are characterized by high levels of security, bonds do bring their dangers. The following table provides a grading of the risk associated with each bond type:
| Bond Type | Default level |
|---|---|
| US Treasury/agency | Almost no chance for default |
| Munis | Slight chance for default |
| Corporate bonds | Higher risk for default |
| Junk bonds | Higher risk for default |
| Foreign bonds | High risk of default |
| Unrated bonds | The highest risk for default |
Factors Determining the Default Level
- Potential returns
The higher the risk level, the higher the potential returns. So, one factor of determining the default level of bonds is their potential returns.
- Maturity period
The relationship is the same - the longer the maturity, the higher the chance for default, since the longer the bondholder is exposed to the market volatility.
- Ranking
An additional factor that can be used when evaluating the chances for default of a bond is the ranking that is given to it by one of the two most reputable ranking services - Moody's Investors Service or Standard & Poor's.
Both of the ranking services grade the trustworthiness of bonds on a scale starting from highest grade, passing thorough high grade, upper medium grade and ending at medium grade. Additionally, ranking is provided for low rated bonds. However, you should select bonds that fall in the ratings mentioned above. On the other hand, if you are a speculator, a low-rated bond may be of interest to you.
To be a successful investor you need two main things - the knowledge and the right trading platform. For a trading platform we can recommend try you Zecco and TradeKing
.
Zecco offers free stock trades, no account minimum, real time quotes, trading community, and is also insured and protected against loss by SIPC.
Opening a Zecco account to benefit from $0 Stock/ETF trading is a smart idea. Free stock trades allow you to preserve more of your wealth and save money, which you can invest instead of paying brokerage commissions.
TradeKing has been rated #1 Discount Broker by SmartMoney’s (the Wall Street Journal Magazine) annual US broker survey. It was also awarded the highest 4-star ranking in Barron's survey of Best Browser-Based Online Brokers. TradeKing platform features real-time portfolio information, advanced order entry, stock, option and mutual fund screeners, customized charting and alerts, volatility charts, a pricing probability calculator, free research and integrated news, and interactive educational information. Open a TradeKing account and get $50.
| Rate this article : Low | High |
- Stock Market Risk Premium
- Bond Definition and Concepts
- 30-Year Long US Treasury Bond
- Municipal Bonds Tax Dilemmas
- Zero Coupon Bonds Basics
- Zero Coupon Bonds Tax Implications
- Bond Ladder Basics
- Convertible Bonds Basics
- US Treasury I Bonds Basics
- Bond Prices and Bonds-Interest Rates Relationship
- Investing in Both Stocks and Bonds
- Bond Tax Rules
- US Treasury Bonds vs US Treasury Notes
- Types of Bonds
- Bond Default Risk
- Stock Beta Value
- Real Rate of Return on Investment Calculations
- Pick the Best Stock Type for You
- Stocks and Inflation Rate
- Stock Basics
- Preferred Stocks Disadvantages
- Cyclical vs Non-Cyclical Stocks
- Avoiding Stock Market Fraud and Scams
- Types of Stock Market Losses
- Minimize Your Stock Losses
- Long-Term Stock Investment vs Short-Term Trading
- Investment Risk Types and Advices
- Investment Risk Tolerance Level
- Assessment of Risk Tolerance
- Dividend Yield Calculation and Drawbacks
- Dividend Payout Ratio Calculation
- Operating Cash Flow Implications
- Stock Valuations - Key Interest Rates Relationship
- Price to Book Ratio Calculation
- Return on Equity Calculation and Drawbacks
- Earnings per Share EPS Calculation
- PEG Ratio Calculation
- Simple Return vs Compound Annual Growth Rate Formula
- Price to Cash Flow Ratio vs Free Cash Flow
- Company Valuation Methods - Debt Evaluating
- Company Valuation Methods - Management Effectiveness Ratios
- Company Valuation Methods - Debt Evaluation Formulas
- Determining the Right Stock Price
- Price to Sales Ratio Calculation
- Price to Earnings Ratio Calculation
- Calculate Return on Investment
- Beta Ratio Basics
- Relative Strength Indicator
- Regulatory Bodies of the Securities Industry
- Stock Portfolio Diversification
- High Risk, High Return
- Value Stocks vs Growth Stocks
- Tax-Free Investments
- The Simplified US Tax Code Proposals
- Longevity Risk and Retirement Plans
- Identifying a Value Stock
- Stock Value Focus
- Market Timing Hidden Traps
- Foreign Stocks Basics
- Asset Allocation Basics
- The Importance of Portfolio Rebalance
- Determining the Number of Stocks to be Included in Your Portfolio
- Earnings Reports and Their Importance
- Inverted Yield Curve Implications
- Stock Market Crash Prevention Measures
- Strategies to Deal with a Down Market
- Government Deficit and Stock Investors
- Stock Portfolio Balance Maintenance Techniques
- Mega Cap Stocks in Your Investment Portfolio
- Time, Risk and Investment Goals
- Investing in REITs - Advantages and Disadvantages
- Small Cap Stocks Opportunities and Risks
- Effects of Inflation on Your Investment Portfolio
- Introduction to Stocks
- Stock Price Volatility
- Stock Valuation Failures
- Large Cap Stock Characteristics
- Small Cap Stocks Characteristics
- Foreign Stock Characteristics
- Technology Stock Characteristics