Question

What ratings comprise investment-grade bonds and what ratings are used for junk bonds? What are the primary differences between the two? In particular, why are investment-grade bonds more marketable and why are junk bonds issued at all? Describe how lower rated bonds may be transformed into securities that investors who are limited to investment grade bonds may be able to purchase.

Answer 1

As per the S&P credit rating agency, All the bonds rated

AAA, AA+ ,AA, AA- ,A+,A,A- , BBB+,BBB,BBB-

All the bonds rated from AAA to BBB - are investment grade bonds.

The junk bond are rated BB + ,BB ,BB -, CC +,CC ,CC- and D.

The primary difference is the yield offered and the probability of default. The AAA rated bonds are relatively safer and has a less chance of defult whereas the junk bonds are high yield bonds and are subject to default. The high level of safety offered in investment grade bonds is the factor behind the high marketability of these bonds. Junk bonds are offered to the investors and the attractiveness of these bonds is the high yield that it offers hence these bonds are also called the high yield bonds.

The lower rated bonds can transform themselves by taking measures of improving their credit worthiness and have a steady cash flow so that they can pay back the bond holders on time and have the capability to raise as well as payback debt. By taking such measures they can be upgraded slowly and the investment grade bond holders can then invest in these bonds.