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2. What are considered speculative or junk bond ratings according to Moody's and Standard & Poor's?...

2. What are considered speculative or junk bond ratings according to Moody's and Standard & Poor's? (10 points)

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Expert Solution

Investors typically group bond ratings into 2 major categories:

  • Investment-grade refers to bonds rated Baa3/BBB- or better.
  • High-yield (also referred to as "non-investment-grade" or "junk" bonds) pertains to bonds rated Ba1/BB+ and lower.

You need to have a high risk tolerance to invest in high-yield bonds. Because the financial health of an issuer can change—no matter if the issuer is a corporation or a municipality—ratings agencies can downgrade or upgrade a company's rating. It is important to monitor a bond's rating regularly. If a bond is sold before it reaches maturity, any downgrades or upgrades in the bond's rating can affect the price others are willing to pay for it.

Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade." Bonds with lower ratings are considered "speculative" and often referred to as "high-yield" or "junk" bonds.

ekkarill92 answered 2 years ago
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