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Subject:  Re: investment grade bonds Date:  1/28/2005  1:37 PM
Author:  jbking Number:  1494 of 2244


What's the difference between a bond and an investment grade bond?

I think it worthwhile to break down the various types of bonds:

Government debt: This can be Treasury as well as other federal agencies that borrow money and are viewed as highly likely to not default.

Mortgage debt: These are GNMAs, Fannie Mae and Freddie Mac and are pooled mortgages that have some unique features like pre-payment risk.

Municipal debt: These are from state and local governments and exempt from most federal taxes.

Savings bonds: These can be looked up at and are completely different than the others.

Corporate debt: Corporations borrow money according to various rules which may include what interest to pay as well as in some cases being convertible rather than returning principal.

Now, investment grade refers to the corporate debt being rated as to how likely is it that the company will pay back the debt. For example, consider how likely it is for some airlines to pay back their debt compared to say Wal-Mart or GE. There is also corporate debt that isn't investment grade and this is usually called junk or high-yield debt since it doesn't score on the ratings. Ratings here coming from S & P or Moody's I believe.

Also, when you buy a bond, does it usually automatically reinvest your interest payment?

For Savings Bonds, yes. For bond mutual funds, yes. For individual bonds, generally no. After all, bonds tend to trade as a whole rather than in pieces which is what you'd expect to get with the interest payment.

Anymore questions?

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