AAA is the highest possible rating credited to Bonds that showcase the highest level of creditworthiness. AAA-rated bonds belong to those who are able to meet all their financial commitments and have the lowest risk of Default. AAA rating can also be given to companies.
rating agencies like Standard & Poor’s (S&P) and Fitch Ratings use AAA to identify bonds with the greatest credit quality. Similar ‘Aaa’ is used by Moody to identify a bond’s top tier credit rating.
When the term ‘default’ is used in this context it refers to a bond issuer failing to make the principal amount of interest payment due to an investor. Since AAA-bonds have the smallest risk of default, the bonds also offer lower payback among other bonds with similar dates of maturity.
In 2020, only two companies in the world were credited the AAA rating- Microsoft (MFST) and Johnson & Johnson (JNJ). AAA ratings are extremely coveted and after the 2008 crisis, many companies had lost their AAA ratings. In mid-2009, only four companies in the S&P 500 possessed the AAA rating.
There are two types of AAA Bonds.
Municipal bonds can be issued in two ways- revenue bonds and general Obligation bonds. Revenue bonds are paid using fees and other Income activities. General obligation bonds are generated by the issuer’s capacity to raise Capital through Taxes.
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Both these bonds come with a varied risk profile. A secured bond means that an asset is pledged as Collateral for the bond. The creditor can claim the asset if the borrower fails, secured bonds are often collateralised with tangible things like machinery, real-estate and equipment.
Unsecured bonds are when the issuer promises to pay. Therefore, this depends on the borrower’s income source.
Firms with AAA rating have a good standing and have easy access to borrow since they are considered as companies with low risk. Their high credit rating lowers the cost of borrowing for the borrower.