You need to have a high risk tolerance to invest in high-yield bonds. Moody’s denotes bonds rated Baa3 or higher as investment grade. Before using ratings as one factor in your investment selection process, learn about the methodologies and criteria each ratings agency employs. For example, the bond ratings for Standard & Poor’s (S&P)S&P – Standard and Poor'sStandard & Poor’s is an American financial intelligence company that operates as a division of S&P Global. Moody's uses a numerical indicator. As of May 2020, due to the Fed’s expansionary monetary policy after the Financial Crisis as well as the recent response to the coronavirus, 10-year US Treasuries yield about 0.65%. Bonds that are not investment-grade are called junk bondsJunk BondsJunk Bonds, also known as high-yield bonds, are bonds that are rated below investment grade by the big three rating agencies (see image below). It is due to investors demanding a higher yield to compensate for the higher credit risk in holding non-investment-grade bonds. If a bond as a AAA rating, then agencies have given it the highest quality rating.
Investors are willing to accept a lower return on such bonds because they know that the bonds are likely to be paid back. These are bonds that investors and rating agencies believe are likely to pay back their debt. However, many investors indirectly own these high yield bonds through mutual funds or ETFs.
Standard & Poor’s denotes bonds rated BBB- or higher as investment grade.
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to take your career to the next level! An investment-grade bond is a bond classification used to denote bonds that carry a relatively low credit riskCredit RiskCredit risk is the risk of loss that may occur from the failure of any party to abide by the terms and conditions of any financial contract, principally, compared to other bonds.
An investment grade bond is a bond that has a credit rating of BBB or higher, according to the Standard & Poor credit rating system. While some investors chase after high yield bonds to grow their money, the important thing to remember is to gauge your risk tolerance and understanding of the bond market. In the 2018 Annual Global Corporate Default and Rating Transition Study by S&P Global, information regarding the global default rates of certain bond ratings can be found. Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties.
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