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Financial Markets For The Rest Of Us


Page 54

  • AAA - Highest quality
  • AA - Very good quality
  • A - Good quality
  • BBB - Medium quality
  • BB - Lower medium quality
  • B - Poor quality
  • C - Speculative quality
  • D - Default

Bonds with BBB or higher grades are considered "investment grade" meaning that they have little risk of default, while the rest are labeled as "junk bonds" meaning a high risk of default. Grade "D" indicates that the bond is already in default.

The grade categories assigned by Moody's are:

  • Aaa - Highest quality
  • Aa - High quality
  • A - Adequate quality
  • Baa - Medium quality
  • Ba - Speculative quality
  • B - Low quality
  • Caa - Poor quality
  • Ca - Speculative quality
  • C - No quality or default

Here, bonds with Baa or higher grades are considered "investment grade" while the rest are "junk bonds."

As a general rule, junk bonds pay higher interests than investment grade bonds following the old rule of risk/reward ratio. So which types of bonds are suitable for you? That depends on your tolerance for risk. Remember that the risk/reward ratio plays an important role in …
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