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In this case the bond yield moves down by 17 basis points:
6%—5.83% = 0.17% or 17 basis points
As can be seen, the bond price and the bond yield always move in
opposite directions. This concept is often a mystery for many but,
hopefully the above example has shed some light on the mechanics of
bond yields relative to their prices.
Bond Ratings
Bonds, like any other type of investment, come with different levels
of risks. A bond investor must always be aware of the associated risks.
While it may be true that bonds offer a certain degree of safety over
other types of securities, there is always a chance that the issuer may
default. Defaulting on bonds means that the issuer may not be able to
fulfill the obligation to repay the investors, and in those cases, the
investors may lose part or all of their investment without recourse.
So how can the bond investor determine the quality of the bonds she
may be interest in? The good news is that the investor can refer to the
bond ratings to get that information. There are several organizations
that rate bonds. Of those, two are the most reputable and most
consulted when it comes to determining the quality of various bonds.
They are Standard & Poor’s (a division of McGraw-Hill) and Moody’s.
These companies do all the research and assign grades to various bonds,
which are then used by investors to gauge the quality of the bonds.
Their research covers a wide range of criteria, including the issuers’
credit history, historical performance, current and future financial
standing, and more.
The grade categories assigned by Standard & Poor’s (S&P) are: …
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