Do government bond ratings seem as complex to you as a plot line in a James Bond film? Not to worry. We’ll explain the ins and outs of government bonds – no code breaking software needed.
What are government bonds?
When investing in government bonds, you are essentially loaning the federal government or a municipality the capital it needs to complete a project. As with any investment, you’ll want to know the level of risk so that you can decide whether the interest rate makes the risk worthwhile.
Are government bonds a risky investment?
Due to the non-negotiable power of tax collection, government bonds are generally considered a lower-risk alternative to corporate bonds. And since there is always some investment risk involved in even the most conservative investment, government bond ratings can be a big help in navigating the downside potential.
Who issues bond ratings?
Bond ratings are issued by independent companies such as Fitch, Moody’s Investors Service, and Standard & Poor’s. These companies assess the financial health of the entity issuing the bond and the likelihood that the entity will be able to pay the bonds upon maturity.
Why are bond ratings important?
Bond ratings not only help investors find the right bonds to diversify their holdings based on their risk tolerance, but they can also give an indication of the overall health of a municipality.
How do low bond ratings affect a municipality?
A low bond rating produces a higher interest rate, or coupon rate. As a result, the bond issue becomes more expensive – leading to higher overall project cost.
Low ratings for government bonds can also affect the general economy. Investors may begin to feel insecure about investing in their local government’s projects. Without investments, infrastructure and other plans lack the needed capital to reach completion.
Are there different types of government bonds?
The two most common types of government bonds are revenue bonds and general obligation bonds. Revenue bonds are secured by the potential revenue of a project – such as a sewer project that will receive future revenues from sewer fees and/or taxes. General obligation bonds are secured by the local government’s ability to levy taxes or fees. Local governments will typically levy a property tax increase to meet the debt service requirements of a general obligation bond.
Government bonds can be a good solution for your investing and income generation needs. If you have questions about bonds, then check with CRI’s governmental CPAs. And the first martini is on us – shaken, not stirred.