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Rating of Bonds - Investment Grade, Speculative, and Junk Bonds
We know that credit rating agencies segment the bonds according to their creditworthiness of the bonds. The credit rating is often represented via letters. In the process, the rating agencies offer different representing designations to make it easier for investors to understand the creditworthiness of the bonds.
Here is the list of bonds that are segmented and named by CRISIL −
AAA (Triple-A) – Highest Safety – High Investment Grade
AA (Double-A) – High Safety – High Investment Grade
A – Adequate Safety – Investment Grade
BBB (Triple B) – Moderate safety – Investment Grade
BB (Double B) – Inadequate Safety/Moderate Risk – Speculative Grade
B – High Risk – Speculative Grade
C – Very High Risk – Speculative Grade
D – Default – Speculative Grade
The creditworthiness is also given different statuses according to the performance of the bonds. For example, the bonds that have the doubtful status of performing well in the future are placed in speculative-grade while those that have a better level of performance are placed in investment grade.
Note that bonds with BB and lower designation are put in speculative grade. This means that these bonds are more susceptible to default than the investment-grade bonds that are above BB grade.
Bonds with AAA are the best bet for investors as the default risk is minimum in them. Investors can, however, earn the least investing in these bonds as the interests in them are the lowest.
Bonds with AA are also safe but their safety is below AAA bonds. There is a chance of lesser default in the case of these bonds too.
Bonds with C and D ratings are of very high risk and it is unsure whether they'd be able to meet the conditions of interest and principal returns in the future.
Bonds with BBB and above are better bets for investors, as they offer lower chances of default and significant assurance of meeting the expectations of investors.
C and D offer higher returns than all other bonds to compensate for their lower rating. These are the bonds with the highest market returns but a considerably higher amount of risk is associated with them.
Speculative-grade bonds come with more doubt of performing well than investment-grade bonds. The speculative-grade starts from BB and comes down till D.
Above speculative-grade (BB), all bonds are given investment-grade designation. They are a safer bet for investment.
Speculative Bonds are also known as Junk Bonds.
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