Question

Which one of the following statements concerning bond ratings is correct?

1) Investment grade bonds are rated BB or higher by Standard Poor's.
2) Bond ratings assess both interest rate risk and default risk.
3) Split rated bonds are called crossover bonds.
4) The highest rating issued by Moody's is AAA.
5) A "fallen angel" is a term applied to all "junk" bonds.

Answer 1

The correct statement here is that 1) investment grade bonds are rated BBB- or higher by Standard & Poor's, but the provided option had a slight error, as it stated BB. Moody's highest rating is Aaa, not AAA, and a 'fallen angel' refers to bonds downgraded to junk, not all junk bonds.

Step-by-step explanation:

The student's question pertains to bond ratings and their correct interpretations. Among the given statements, the accurate one is that investment grade bonds are rated BB or higher by Standard & Poor's. However, this statement contains a small error as investment grade bonds are actually rated BBB- or higher by Standard & Poor's. Moody's equivalent is Baa3. Ratings assist in assessing the default risk, not interest rate risk. Split rated bonds are indeed called crossover bonds when they receive different ratings from different rating agencies. The highest rating issued by Moody's is Aaa, not AAA. Lastly, a 'fallen angel' refers specifically to a bond that was once rated as investment grade but has been downgraded to junk status – not all junk bonds are classified as fallen angels.