Question

Of the following bond ratings, which option is likely to require highest rate of return?

	a.	AA
	b.	A
	c.	BBB
	d.	BB
	e.	B

Answer 1

The B grade bond rating will have the highest rate of return among the given options.

As per the Standard & Poors rating of investment grade, B is considered to be the lowest grade. AA and A are high grade bonds, then come BBB and BB while B is the lowest investment grade bond.

The higher grade bond issuers are in a better position to honor their debts and as the risk is low the rate of return for investors is low. As the saying goes, "the higher the risk, the higher the return". When investor will give money to lower grade bond then they will demand higher return as the risk is high. Therefore, B-grade bonds will have the highest return as they are having the lowest investment grade rating