Question

What do bond ratings indicate? How do bond yield vary with these ratings? Why do banks generally avoid junk bonds? please explain. thank you

Answer 1

Bond ratings indicates the quality of the bonds and the ability of the bonds to repay their capital as bond ratings are investible and the junk ratings so those bonds which are in investable in nature will be having higher repayment ability and those ones who are junk in nature will have lower repayment ability.

Bond yield will vary with these ratings as bond yields for those bonds who are junk in nature will be high because they will be having higher risk and those bonds who are investable in nature will have a low bond yield because their rate of return will be lower as they are secured.

banks will avoid junk bonds by looking at their credit ratings which will be on the lower side and they will not be investing into those bonds as those bonds can not repay capital.