Question

Moody’s Investor Service has issued Company X with a credit rating of Aaa and Company Y with a credit rating of Ba.

i. Based on this information, from which company would you buy a bond? Explain your answer

Answer 1

Based on the ratings , Company X has been assigned a rating of Aaa which signifies that the stock of this company is an investment grade stock.

Investment grade stock , is a stock which will pay the principal payments and interests which are due and there is very small probability of a default by this company.

Company Y, which is assigned a rating which is below the investment grade , signifies that there is a probability of default and the company can default on the principal and interests payments.

So, based on this information i would buy the bond from Company X.