Stock Market Investors » Investing in Stocks and Bonds » Bond Default Risk

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 recommend you try Zecco and E*TRADE.
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.
E*TRADE is ranked #1 Online Broker for third straight year by SmartMoney magazine (written by the Wall Street Journal editors and owned by Dow Jones). The ranking was based on the following categories: mutual funds & investment products, banking services, research, trading tools, and customer service. They have been in this business for 25 years, have 4.5 million accounts worldwide and $100 Billion in customer assets. Open an E*TRADE account here and get 100 commission free trades.

For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

Article Tools

Rate this article : Low

Currently 2.4/5 Stars
1
2
3
4
5

High

Bookmark this page :

Email to a friend | Print this page | Link to this article | Digg this