What is Non-investment grade bond?
A non-investment grade bond, also called a speculative bond, a high yield bond, an unsecured debenture, or a junk bond, is a bond that is considered a low quality investment because the issuer may default. … Non-investment grade bonds offer higher yields than investment grade bonds to compensate for the greater risk.
Are non-investment grade bonds safe?
Non-Investment-Grade Bond Ratings (aka Junk Bonds)
They are especially dangerous when acquired with borrowed money, as has been the fad recently with certain high-yield bond funds that are attempting to make up for low-interest rates by artificially juicing returns.
What rating is a non-investment grade bonds?
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.
What is considered an investment grade bond?
Bonds that are believed to have a lower risk of default and receive higher ratings by the credit rating agencies, namely bonds rated Baa (by Moody’s) or BBB (by S&P and Fitch) or above. These bonds tend to be issued at lower yields than less creditworthy bonds.
What is the importance of knowing the difference between an investment grade and non-investment grade bond?
Investment-grade bonds always pay all interest payments on time, whereas most non-investment-grade bonds do not II. To enable bond mutual fund buyers to have a better sense of the risk level of the fund III.
Why would investors buy a junk bond?
Why would investors buy a junk bond? … Because junk bonds pay higher rates of interest, some investors are willing to back companies with below-investment-grade credit and higher chances of defaulting on their loans.
Why would someone invest in a bond with a low rating?
The bond’s rating tells you the degree of risk that the company issuing it will default on its obligations. The lower the rating, the higher the yield will be. The higher the rating, the safer your money will be.
What are the disadvantages of junk bonds?
Junk bonds have below investment bond ratings from rating agencies because they are riskier credits. Their yields are higher because of this. For the investor, this means junk bonds receive higher interest rates. Junk bonds are often issued by companies who have been stymied by a weak financial performance.
Is a Ba3 rating good?
Ba2/BB are credit ratings just below investment grade, considered more speculative. Ba2 falls above the Ba3 rating and below Ba1, while BB is above BB- and below BB+. Moody’s uses the Ba2 rating, while S&P and Fitch use BB.
What are Moody’s bond ratings?
Moody’s long-term ratings are opinions of the relative credit risk of financial obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised.