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Author: greenmartianV Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35272  
Subject: Re: What to do with My Savings... Date: 7/11/2010 5:14 PM
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Lower rated bonds are considered junk bonds, and those below BB can be quite risky.

Minor comment, but you also have to look at the ratings with a jaded eyes as they seem to be assigned based on the total financial condition of a company rather than with regard for the specific maturity of a particular bond. To use a recent example I am familiar with, I looked at a recent retailer very short term bond (under a year) which was junk rated. However, this company's fiscal year balance sheet showed 800m in cash and 600m in total debt and the company generated plenty of free cash flow (enough so that this company was a rumored takeover target). Yet, when you looked at the maturity of that debt in total, about 300m was due five years from now - so in essence, this company had 800m in cash and 300m in debt for the bond I looked at. There is no way in heck this ought to be considered less than investment grade and in fact I'd argue that, given what we know of the company and this particular maturity, the "true" rating on this bond should have been pristine. Yet, the ytd maturity on this note was almost 3% (doesn't sound like a lot but that maturity was under a year).

Bottom line - the ratings do not take into account the specific maturity of a specific bond. This creates a lot of inefficiencies, especially in smaller company with smaller lots being offered.
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