Bond ratings provide investors with an assessment of the creditworthiness of the issuer. Independent rating agencies assign these ratings and can significantly impact a bond's interest rate and market value.
Which of the following best describes the purpose of bond ratings?
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A) The maturity date is a separate characteristic of a bond. B) Rating agencies assign bond ratings to assess the creditworthiness of a bond issuer. C) The bond rating influences the coupon rate but is different. D) Duration measures a bond's sensitivity to interest rate changes, not directly related to its credit rating.
What is the primary difference between investment-grade and non-investment-grade bonds?
A) Maturity date is unrelated to the credit rating. B) The credit rating may influence coupon rate but is not the primary difference. C) Investment-grade bonds have a higher credit rating, indicating a lower risk of default, while non-investment-grade bonds have a lower credit rating, meaning a higher risk of default. D) Duration is not directly related to the credit rating.
In the early 2000s, a major telecommunications company experienced a significant decline in its financial health, leading to a series of bond rating downgrades. As a result, the company's bond yields increased, and its market value decreased, reflecting the heightened credit risk associated with its debt securities.
What is the most likely outcome for a bond that has been downgraded by a rating agency?
A) A downgrade typically leads to an increase in yield, as investors demand higher compensation for the increased credit risk. B) An increase in yield is the most likely outcome for a downgraded bond, reflecting the heightened credit risk. C) Maturity date is unrelated to the credit rating and would not change due to a downgrade. D) Coupon rate is set at issuance and would not change due to a downgrade, although future bond issuances may have higher coupon rates to compensate for the increased credit risk.
A city government issues bonds to finance infrastructure projects. A rating agency assigns the bonds an AA rating, indicating a low risk of default.
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Example Series 65 Example Practice Question
Investment grade is quite the rave, BBB and above to save. High yield bonds, they take a risk, BB or less, they're quite brisk.
- Investment Grade: Bonds rated by rating agencies as having a lower risk of default and are considered safer investments. - Junk Grade (also known as High-Yield or Speculative Grade): Bonds rated by rating agencies as having a higher risk of default and are considered riskier investments.
- Investment Grade example: A bond rated 'BBB' or higher by Standard & Poor's (S&P) or 'Baa' or higher by Moody's. - Junk Grade example: A bond rated 'BB' or lower by S&P or 'Ba' or lower by Moody's.