Bond rating systems
Investors are found to bear this common apprehension that all bonds are identical. This idea however, is pretty far from the truth. Bond ratings came into existence and were developed gradually over a period of time with an objective to aid the investors realize the amount of risks involved with regard to the different kinds of bonds available in the market.
It is only those bonds that are issued by the federal government or agencies that bear the least amount of risks but, apart from them, every other variety of bonds does bear a certain amount of risks that the investor ought to be aware of before hand. This mechanism of bond rating allows the investor to comprehend this potential risk that exists by default. He can not only evaluate the various determining conditions of the bond, but also effectively balance this default risk. This takes into account the interest payments that are paid to the investor on the bonds.
Investment in bonds is considered to be safe due to the fact that the investor receives his payment on interest expense prior to the payments to the stock-holders. There is a negligible chance of non-payment unless of course, the company decides to declare bankruptcy.
Although, this risk may mot be a magnanimous one, there might be companies that go default on their bonds. This entails that the said risk is not merely perceived, it is indeed real. In such a situation, the bond-holder or the investor does not receive his interest payment but, he might as well end up losing his entire investment on the bond.