Bond Ratings and Rating Agencies
Chapters in this video
- 0:00 Bond ratings and the investment-grade cutoff
- 1:29 The three major rating agencies and notation styles
- 2:24 Mapping the rating scale from AAA down to BBB
- 2:57 Pattern interrupt: the BBB- cutoff trap
- 3:55 Why the cutoff matters: institutional restrictions and forced selling
- 5:51 Pattern interrupt: ratings do NOT measure interest rate risk
- 6:44 The seesaw: credit quality and yield as opposites
- 7:36 Rapid-fire exam recap
What this video covers
- The three major rating agencies (Moody's, S&P, and Fitch) and how to tell them apart by notation style: Moody's uses numbers, S&P and Fitch use plus and minus signs
- The exact investment-grade cutoff line at BBB- (S&P and Fitch) and Baa3 (Moody's), and why BBB+ is a common exam trap
- What a fallen angel is: a bond downgraded from the lowest investment-grade rating into junk territory, and why institutional forced selling causes a sharp price drop
- Why bond ratings measure credit (default) risk only, not interest rate risk or market risk, so even a AAA bond loses value when rates rise
- The inverse seesaw relationship between credit rating and yield: higher rating means lower yield, lower rating means higher yield
- How risk and reward move together, and why speculative-grade issuers must pay more to attract buyers
- Why pension funds and insurance companies face legal restrictions that prohibit them from holding below-investment-grade bonds
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