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Have one heard these A, AA, or AAA bond can default. If there is a possibility, what should I do? buy US treasure only?

  • The treasury can default as well. The last time was the Liberty Bond default of 1934. I believe the US treasury has defaulted, on average, every 70 years since independence. – Nick Dec 8 '16 at 2:41
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Have one heard these A, AA, or AAA bond can default.

Yes they do default. The other aspect is they can get downgraded over the period. So what you are holding as AA bond, can quickly become a BB; if you sell, you would potentially make loss.
At times its an isolated instance, at times it is compounded by some other factors. For example 2008 downturn, quite a few Mortgage backed securities lost money. Quite a few other bonds lost their ratings. Investopedia has a good article.

Enron is another classic example with bonds rated high and going bust overnight.

If there is a possibility, what should I do?

In today's world, there is nothing that is 100% safe. So the best strategy is to diversify into multiple unrelated class of instruments.

  • So an AA bond would not be default without be downgraded first? In that case, if I held the bond to maturity, I still get my full amount back no matter it is rated how junk like B, BB-? – Tony Dec 10 '16 at 20:35
  • @Tony It depends; at times things go bad so fast that it may [or may not] be downgraded few hours before the bond goes bankrupt. Or an AAA bond over period of few months is classified as junk. One may already loose money as when it purchased it was AA, then when he trying to sell it becomes B or junk. A bond that is rated AA can go bust overnight and one can loose money. The charges are less likely. Note there is nothing explicitly guaranteed that AA bond will always give returns. A B, BB- bond may give returns when held to maturity. The chances of going bust are moderate [but higher than AA]. – Dheer Dec 11 '16 at 18:26

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