Question

Explain Differences in quality or risk of default in bonds and use an example.

Answer 1

Bonds are provided rating to signify their performance and associated risk. Different rating agencies have different nomenclature to define these ratings. The main agencies are Moody’s and S&P Fitch. Moody’s ratings are Aaa, Aa, A, Baa, Ba, B, Caa and C. where Aaa is the best rating with lowest risk and highest performance while bonds with Ba, B or lower rating are effectively junk bonds. Similarly, S&P gives rating in the form of AAA, AA, A, BBB, BB, B, CCC, CC, C and D. Any bond with BB rating or lower is considered junk bond. S&P rating of D makes a bond default bond.