Ratings of Debt Obligations
Definition Standard & Poor's Moody's Investor Fitch IBCA, Duff & Phelps Thomson
Ratings Group Services Inc. Rating Co. BankWatch, Inc.
Highest quality AAA Aaa AAA AAA AAA
High quality AA Aa AA AA AA
Upper medium A A A A A
Medium grade BBB Baa BBB BBB BBB
Low grade BB Ba BB BB BB
Speculative B B B B B
Submarginal CCC, CC, C Caa, Ca CCC, CC, C CCC CCC, CC
Probably in D C DDD, DD, D DD D
Types of Bond Funds
A bond mutual fund can be a versatile investment – either serving as a short-term investment for a purchase in the
near future, or as a balance to a portfolio meant for retirement or other long-term goals. Depending on your risk
tolerance and time frame, there are a variety of investments to choose from.
Corporate Bond Funds seek a higher level of income by investing primarily in investment-grade corporate bonds.
These funds may also invest assets in other types of fixed income securities, such as U.S. government securities and
Government Bond Funds seek income by investing in government securities such as Treasury bonds and
government agency obligations. Although these bonds are government-issued and highly rated, the funds are not
insured or guaranteed by the U.S. government.
Municipal Bond Funds seek federally tax-exempt income by investing in bonds issued by state and local authorities.
Income from these Funds may be subject to state and local taxes and, depending on your tax status, the Alternative
Minimum Tax. However, the tax benefits may still be useful to some shareholders. To discover how a taxable and
tax-free yield compare, use the following formula: taxable equivalent yield = tax-free yield/(1 - your tax rate).
High-Yield Bond Funds seek a higher level of income than other bond investments. These funds will invest primarily
in non-investment grade corporate bonds and generally entail a higher degree of risk. Due to the greater amount of
share price volatility in these funds, investors should look to them as long-term investments of at least four years.
Some bond funds may blend the different approaches listed above – for example, high-yield municipal bond funds.
With all of the different types of mutual funds available to you, how do you know which one will provide the right fit?
Know Your Risk Tolerance
The higher the level of income you want to pursue, the greater the risk involved. You should probably be prepared to
tolerate an increased level of share price fluctuation, and keep in mind that more aggressive funds may be more
suitable for longer term investments.