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.
- 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
The grade categories assigned by Moody's are:
Here, bonds with Baa or higher grades are considered "investment
grade" while the rest are "junk bonds."
- 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
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 …