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Series 79 practice questioneasyHigh Yield Bonds

What credit rating generally distinguishes investment-grade bonds from high-yield bonds?

  1. ABBB- / Baa3 and above is investment grade; BB+ / Ba1 and below is high yield✓ Correct answer
  2. BA- / A3 and above is investment grade; BBB+ / Baa1 and below is high yield
  3. CAA- / Aa3 and above is investment grade; A+ / A1 and below is high yield
  4. DAAA / Aaa is investment grade; everything else is high yield
Explanation

Why A — BBB- / Baa3 and above is investment grade; BB+ / Ba1 and below is high yield

The dividing line between investment grade and high yield (also known as 'junk bonds' or speculative grade) is BBB- (S&P and Fitch) or Baa3 (Moody's). Securities rated at or above these levels are considered investment grade, while those rated below are classified as high yield. This distinction is significant because many institutional investors (pension funds, insurance companies) have mandates restricting them to investment-grade securities. When a bond is downgraded from investment grade to high yield (a 'fallen angel'), it can experience significant price declines as forced selling occurs.

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