Bond Ratings & Credit Risk

Q: Which bond rating is highest quality?

AAA. AAA is the top rating — the issuer is considered extremely likely to repay the debt.

Q: A "junk bond" is also called:

A high-yield bond. Junk (or high-yield) bonds are rated below investment grade (below BBB-) and pay higher interest to compensate for higher risk.

Q: Credit spread refers to:

The extra yield a corporate bond pays over a Treasury. Credit spread is the additional yield investors demand for taking on credit risk vs. the risk-free Treasury rate.

Q: If a company's credit rating is downgraded, its bond prices typically:

Fall. Downgrades increase perceived risk, so investors demand higher yields — which means prices must fall.

Rating agencies like Moody's and S&P grade bonds from AAA (safest) to D (in default). Investment-grade bonds are BBB and above. Below that are "high yield" or junk bonds — higher returns, but much higher default risk.

Quick quiz and answers

Which bond rating is highest quality?

Answer: AAA. AAA is the top rating — the issuer is considered extremely likely to repay the debt.

A "junk bond" is also called:

Answer: A high-yield bond. Junk (or high-yield) bonds are rated below investment grade (below BBB-) and pay higher interest to compensate for higher risk.

Credit spread refers to:

Answer: The extra yield a corporate bond pays over a Treasury. Credit spread is the additional yield investors demand for taking on credit risk vs. the risk-free Treasury rate.

If a company's credit rating is downgraded, its bond prices typically:

Answer: Fall. Downgrades increase perceived risk, so investors demand higher yields — which means prices must fall.

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