Credit Rating

Credit rating
The most significant issuers of bonds are central governments. Others are local governments, financial institutions, and companies. Corporate bonds are more common in the US than in Europe.
Central governments issue bonds to finance their budget deficit. In the US, the issuances are organised by the Department of the Treasury. The most important types of securities in this market are T-bills, T-notes, and T-bonds. (T stands for Treasury.) T-bills are money market instruments, with 12-month maturity at most. These securities do not pay any interest, so they have only one cash flow: the face value at maturity. In case of positive discount rates, their price is under their face value and vice versa. T-notes and T-bonds are coupon-bearing instruments, with semi-annually interest payment period. T-notes are medium-term assets, T-bonds are issued with at least 10 years of maturity. We may observe that in the case of the US Treasury securities, only the longest instruments are called bonds. However, the economic and financial sense of bills and notes are the same, and they belong to the same broader class of financial assets. It is quite general that the money market securities of the central governments are zero-coupon instruments, and that they have a distinct name.
Government bonds are often called risk-free instruments, since governments (countries) cannot go bankrupt. This is a very simplistic statement, for two reasons. First, we have to clarify that in this statement risk refers exclusively to credit risk, that is to the risk that the issuer is not able or not willing to pay its obligations. There are several other types of risk that a bondholder may take, the most important being the interest rate risk. Second, sovereign defaults occurred more frequently and in more countries than one might think – not only in South America, not only after military coups, not only in foreign currency, not only with very high debt/GDP ratio. However, we admit that government bonds issued in local currency are usually the safest investments within a country, concerning credit risk.