Final answer:
Standard & Poor's rates investment grade bonds based on their creditworthiness, with a rating of 'BBB-' or higher indicating investment grade. These ratings influence the rate of return, as higher-risk bonds typically offer higher yields. S&P's ratings, like those from Moody's, are essential for investors to assess the risk and potential returns of bond investments.
Step-by-step explanation:
Standard & Poor's (S&P) rates investment grade bonds based on a specific set of criteria that assesses the creditworthiness of issuers. An investment-grade bond is categorized as such if it receives a rating of 'BBB-' or higher from S&P.
The rating reflects the likelihood that the bond issuer will be able to meet its debt obligations. S&P analyzes various factors including the issuer's financial stability, historical borrowing history, and repayment behavior to determine a rating.
The higher the rating, the lower the perceived risk, which generally leads to a lower yield offered by the bond. The ratings can range from 'AAA' for the highest quality bonds with the lowest risk of default, to 'BBB-' for the lower end of investment-grade bonds.
For instance, corporate bonds with an AAA rating are considered relatively safe borrowers. Moody's, another independent rating firm, also publishes such ratings.
Both firms rate bonds to help investors understand the risk associated with bond investments, and those ratings influence the rate of return, as investors demand higher returns for higher-risk bonds. The rate of return for bonds consists of compensation for delaying consumption, an inflation adjustment, and a risk premium that accounts for the borrower's credit risk.