Question

Would the required rate of return be lower on an CCC rated bond or a BBB rated bond, and why?

Answer 1

Bond Rating is one of the measures to check the creditworthiness and quality of a bond. This in return, corresponds to the cost of borrowing for an issuer. Bond Rating is carried out by credit rating agencies such as  Standard & Poor's, Moody’s Investors Service, Fitch Ratings Inc. After the bonds are evaluated, they are assigned a letter-based credit scoring rating. Each agency has its own rating.

Generally, all else equal, the higher a bond's rating, the lower the interest rate it will carry. The logic behind this is that when the bond has a high rating, it has no or very low risk of default and the lender's funds are safer. But when the rating is low, the risk of default is higher. So the lender is compensated with a higher rate of return as a reward for the risk undertaken by him.

Thus in the above case, the required rate of return be higher on a CCC rated bond compared to a BBB rated bond, since "CCC" is at a low rating than "BBB".