Two features of a bond—credit quality and time to maturity—are the principal determinants of a bond's coupon rate. If the issuer has a poor credit rating, the risk of default is greater, and these bonds pay more interest. Bonds that have a very long maturity date also usually pay a higher interest rate. This higher compensation is because the bondholder is more exposed to interest rate and inflation risks for an extended period.<\/p>" } } , { "@type": "Question", "name": "How Are Bond's Rated?", "acceptedAnswer": { "@type": "Answer", "text": "
Credit ratings for a company and its bonds are generated by credit rating agencies like Standard and Poor’s, Moody’s, and Fitch Ratings. The very highest quality bonds are called “investment grade” and include debt issued by the U.S. government and very stable companies, such as utilities. Bonds that are not considered investment grade but are not in default are called “high yield” or “junk” bonds. These bonds have a higher risk of default in the future, and investors demand a higher coupon payment to compensate them for that risk.<\/p>" } } , { "@type": "Question", "name": "What Is Duration?", "acceptedAnswer": { "@type": "Answer", "text": "
Bonds and bond portfolios<\/a> will rise or fall in value as interest rates change. The sensitivity to changes in the interest rate environment is called “duration.” The use of the term duration in this context can be confusing to new bond investors because it does not refer to the length of time the bond has before maturity. Instead, duration describes how much a bond’s price will rise or fall with a change in interest rates.<\/p>"
}
}
]
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]