They rate bonds on a number of factors, including the financial health of the issuer, the ability to make the future coupon and par value payments, and the issuer's past credit history. They are rated on a scale, which ranges from AAA, the highest investment grade, to D, for default. Corporate bonds are an important source of corporate funding. Investors usually decide on the highest level of risk they are willing to accept, and then try to find a bond that has the best current yield. These bonds carry a high rate of return as compensation for the possibility of default.
Investors usually purchase corporate bonds as long-term investments.
Municipal Bonds are bonds issued by state and local government units to fund different types of public works. They are generally regarded as safe because state and local governments do not go out of business. Because governments have the power to tax, it is presumed that they can pay interest and principal in the future. Municipal bonds are generally tax-exempt. This allows the governmental unites to pay a lower rate of interest on the bonds, thus lowering their cost of borrowing.