What Is a AAA Credit Rating?

AAA is the highest possible rating that may be assigned to an issuer’s bonds by any of the major credit-rating agencies. AAA-rated bonds have a high degree of creditworthiness because their issuers are easily able to meet financial commitments and have the lowest risk of default.

Rating agencies Standard & Poor’s (S&P) and Fitch Ratings use the letters “AAA” to identify bonds with the highest credit quality, while Moody’s uses a slightly different “Aaa” to signify a bond’s top-tier credit rating.

Understanding AAA

Since AAA-rated bonds are perceived to have the lowest risk of default, these instruments tend to offer investors the lowest yields among bonds with similar maturity dates (lower risk = lower return). The term “default” refers to a bond issuer failing to fulfill its obligations, namely failing to make semiannual interest payments or repay the principal amount when due.

AAA ratings are given to government debt and companies’ corporate bonds. The global credit crisis of 2008 resulted in a number of companies losing their AAA rating, most notably General Electric (GE). As of September 2022, only two companies held the AAA rating outright: Microsoft (MSFT) and Johnson & Johnson (JNJ). Apple (AAPL) is split, with a Aaa rating by Moody’s and a AA+ (one notch below AAA) from S&P.

Even the United States suffered a ratings cut by S&P, to AA+ in 2012—losing its vaunted AAA status due to political infighting over raising the debt ceiling. Moody’s and Fitch maintained the U.S. at Aaa and AAA ratings, respectively.

Types of AAA Bonds

Municipal

Municipal bonds can be issued as either revenue bonds or general obligation bonds—with each type relying on different sources of income.

Revenue bonds, for example, are paid using fees and other specific income-generating sources, like city pools and sporting venues. On the other hand, general obligation bonds are backed by the issuer’s ability to raise capital through levying taxes. Pointedly: State bonds rely on state income taxes, while local school districts depend on property taxes.

Secured and Unsecured

Issuers can sell both secured and unsecured bonds. Each type of bond carries with it a different risk profile.

A secured bond means that a specific asset is pledged as collateral for the bond, and the creditor has a claim on the asset if the issuer defaults. Secured bonds may be collateralized with tangible items such as equipment, machinery, or real estate. Secured collateralized offerings may have a higher credit rating than unsecured bonds sold by the same issuer.

Conversely, unsecured bonds are simply backed by the issuer’s promise to pay. Therefore, the credit rating of such instruments relies heavily on the issuer’s income sources and business outlook.

Benefits of a AAA Rating

A high credit rating lowers the cost of borrowing for the issuer (or borrower). Therefore, it stands to reason that companies with high ratings are better positioned to borrow large sums of money than fixed-income instruments with lesser credit ratings. And a low cost of borrowing affords firms a substantial competitive advantage by letting them easily access credit to grow their businesses.

For example, a business may use the incoming funds from a new bond issue to launch a new product line, set up shop in a new location, or acquire a competitor. All of these initiatives can help a company increase its market share and thrive over the long haul.

The Bottom Line

Credit ratings are assigned to debt issues and bonds by the three major debt-rating agencies: S&P, Moody’s, and Fitch. Their credit ratings have a strong influence on the cost of borrowing for the issuer. The better the credit rating, the lower the cost to borrow.

AAA/Aaa ratings are the highest ratings issued by the credit-rating agencies and likely result in the lowest borrowing costs or yields. Investors seeking a better return should look down the credit-ratings scale for bond issuers with lower ratings and higher yields.

What Is a 12B-1 Fee?

A 12b-1 fee is an annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund’s expense ratio. It is generally between 0.25% and 0.75% (the maximum allowed) of a fund’s net assets. The fee gets its name from a section of the Investment Company Act of 1940.

Understanding 12B-1 Fees

Back in the early days of the mutual fund business, the 12b-1 fee was thought to help investors. It was believed that by marketing a mutual fund, its assets would increase and management could lower expenses because of economies of scale. This has yet to be proven. With mutual fund assets passing the $10 trillion mark and growing steadily, critics of this fee are seriously questioning the justification for using it. Today, the 12b-1 fee is mainly used to reward intermediaries for selling a fund’s shares. As a commission paid to salespersons, it is currently believed to do nothing to enhance the performance of a fund.

In 2015, the Securities and Exchange Commission (SEC) began examining the use of 12b-1 fees to determine if the rules for charging these fees are being adhered to and the presence of such fees is being properly disclosed.

12b-1 Fee Broken Down

The 12b-1 fee can be broken down into two distinct charges: the distribution and marketing fee and the service fee. Total 12b-1 fees charged by a fund are limited to 1% annually. The distribution and marketing piece of the fee is capped at 0.75% annually, while the service fee portion of the fee can be up to 0.25%.

Use of 12b-1 in Broker-Sold Shares

Class B and class C shares of broker-sold funds typically have 12b-1 fees, but they may also be charged on no-load mutual fund shares and class A broker-sold shares.

Class A shares, which usually charge a front-end load but no back-end load, may come with a reduced 12b-1 expense but normally don’t come with the maximum 1% fee. Class B shares, which typically carry no front-end but charge a back-end load that decreases as time passes, often come with a 12b-1 fee. Class C shares usually have the greatest likelihood of carrying the maximum 1% 12b-1 fee. The presence of a 12b-1 fee frequently pushes the overall expense ratio on a fund to above 2%.

The Calamos Growth Fund is an example of a fund that carries a smaller 0.25% 12b-1 fee on its class A shares and charges the maximum 1% 12b-1 fee on its class C shares.

What 12b-1 Fees Are Used For

The distribution fee covers marketing and paying brokers who sell shares. They also go toward advertising the fund and mailing fund literature and prospectuses to clients. Shareholder service fees, another form, specifically pay for the fund to hire people to answer investor inquiries and distribute information when necessary, though these fees may be required without the adoption of a 12b-1 plan. Another category of fees that can be charged is known as “other expenses.” Other expenses can include costs associated with legal, accounting, and administrative services. They may also pay for transfer agent and custodial fees.

What Was Form 1040EZ: Income Tax Return for Single and Joint Filers With No Dependents?

IRS Form 1040EZ: Income Tax Return for Single and Joint Filers with No Dependents was the shortened version of the Internal Revenue Service (IRS) Form 1040. This form was for taxpayers with basic tax situations and offered a fast and easy way to file income taxes. 

The form was discontinued as of the 2018 tax year in favor of the redesigned Form 1040.

Who Could File Form 1040EZ: Income Tax Return for Single and Joint Filers With No Dependents?

To use the form, a taxpayer had to have taxable income of less than $100,000, less than $1,500 of interest income, and claim no dependents. Other requirements for filing the Form 1040EZ included:

• The taxpayer and their spouse, if married filing jointly, had to be under age 65 at the end of the relevant filing period.
• They could not be blind as of the end of the relevant filing period.
• The filer could take no deductions for student loan interest, educator expenses, tuition and fees, or itemized deductions.
• If the filer received interest income, they could not have been required to file Schedule B, didn’t have amounts in boxes 11, 12, or 13 of Form 1099-INT or boxes 6 and 10 of Form 1099-OID, and didn’t earn any interest as a nominee.
• Tax credits for retirement savings, health coverage, and education were not allowed.
• The tax filer could not have received any advance earned income credit (EIC), although they would have been allowed to claim the EIC when filing Form 1040EZ.
• The filer could not be a debtor in any Chapter 11 bankruptcy case that was filed after October 16, 2005.
• The filer, their spouse, if married filing jointly, or any of their dependents for which they claimed the personal exemption didn’t receive any advance payments of the premium tax credit offered for health coverage plans sold on the Marketplace.
• The filer doesn’t owe any household employee taxes on wages paid to household employees.

For most individuals, the 1040EZ was the first tax form they ever completed. Consider a typical high-school student employed part-time. Provided they met the income qualifications, the 1040EZ will likely be the most straightforward and appropriate form to file. 

Form 1040EZ vs. Form 1040

Form 1040EZ had only a few credits or deductions available to taxpayers. Filers were able to include an earned income credit (EIC) and elect nontaxable combat pay.

For most tax years, Form 1040 had 80% more lines than form 1040EZ. One significant difference was that Form 1040 had fields to include information about dependents, while 1040EZ did not allow individuals to claim dependents. Similar to the standard form, the EZ version had sections to record wages, salaries and tips, and taxable interest under $1,500. The filer was also able to include unemployment compensation payments.

Form 1040EZ allowed filers to claim income from wages, tips, salaries, taxable grants or scholarships, the Alaska Permanent Fund, and unemployment compensation. Form 1040, though, had at least 16 income categories.

Categories available on the standard form included dividend payments, retirement account distributions, and farm and rental income. Form 1040 also allowed the entry of Social Security benefits, alimony, and other forms of income. This form also had a long list of deductions, ranging from education costs to healthcare savings plan contributions.

What Was Form 1040-A: U.S. Individual Tax Return?

Form 1040-A of the Internal Revenue Service (IRS) was a simplified version of Form 1040 used by U.S. taxpayers to file an annual income tax return. To have been eligible to use Form 1040-A, an individual needed to meet certain requirements such as not itemizing deductions, not owning a business, and having a taxable income of less than $100,000. Unofficially known as the “short form,” Form 1040-A was eliminated for the 2018 tax year in favor of the redesigned Form 1040 that debuted that year.

Who Had to File Form 1040-A: U.S. Individual Tax Return?

Most U.S. taxpayers use IRS Form 1040 to file their income tax returns. Form 1040 is a detailed form that offers taxpayers with complex investments, itemized deductions, multiple tax credits, and more than $100,000 in annual income more opportunities to lower their tax liability. Because additional paperwork is usually required with Form 1040, individuals with simpler tax situations previously had the option to use Form 1040-A instead.

Form 1040-A was a simplified version of Form 1040. The two-page form allowed taxpayers to report ordinary income, some deductions, and credits. Individuals who fell under any of the five status options—single, head of household, married filing separately, married filing jointly, or widowed—could file their tax returns using the 1040-A. Though Form 1040-A was available to taxpayers of any age and filing status, not everyone qualified to use this form.

Tax filers who used 1040-A must have earned less than $100,000 taxable income and not have exercised any incentive stock options (ISO) during the tax year. The income reported must have been earned as a wage, salary, tip, capital gain, dividend, interest income, unemployment compensation, pension, annuity, taxable Social Security and railroad retirement benefit, taxable scholarship or grant, and Alaska Permanent Fund dividend. Any other form of income, such as business income, needed to be reported on the more complex Form 1040.

How Did Form 1040-A Work?

Form 1040-A also gave taxpayers the opportunity to claim several tax deductions to reduce their taxable income. However, the only deductions they could claim included student loan interest, post-secondary tuition and fees, classroom expenses, and individual retirement account (IRA) contributions. Taxpayers using Form 1040-A could not claim itemized deductions. This limitation meant that if an individual qualified for other deductions from sources such as charitable donations or mortgage interest, and the total itemized deductible amount was more than the standard deductions, it would not have been advantageous for them to use 1040-A.

Form 1040-A also could be used to claim tax credits. Tax credits reduce the bottom line or total tax bill of a taxpayer. The credits that could be claimed using this form were the American Opportunity Tax Credit (AOTC), Earned Income Credit (EITC), child tax and additional child tax credit, child and dependent care credit, credits for the elderly or disabled, and retirement savings contribution credit.

Form 1040-A vs. Form 1040-EZ

Another variant of Form 1040 was Form 1040-EZ, which was even simpler and easier to fill out than Form 1040-A and was also eliminated starting with the 2018 tax filing. But with Form 1040-EZ, the individual had to file as either a single taxpayer or as married filing jointly; they could not claim deductions and could only claim the EIC.

Although Form 1040-A was slightly more complex than Form 1040-EZ, it was still relatively simple compared to 1040. Once their financial situation became complicated with dependents, special deductions, and credits—such as those associated with post-secondary education tuition—most taxpayers needed to switch from filing with the 1040-EZ to the 1040-A.

The redesigned Form 1040 that debuted with the 2018 tax year is designed to be much simpler to use than its predecessor. For this reason, the IRS eliminated both Form 1040-A and Form 1040-EZ.