Bond Ratings
Chapters in this video
- 0:00 Carla's bond lost value: the interest rate risk trap
- 1:06 The rating agency Big Three and their modifier languages
- 2:25 The BBB-/Baa3 velvet rope: investment grade versus junk
- 4:03 What ratings measure and do not measure: default risk only
- 5:09 The fallen angel: anatomy of a downgrade disaster
- 6:57 Inverse price-yield relationship on downgrades and upgrades
- 7:22 Rapid-fire exam recap
What this video covers
- The three major credit rating agencies (Standard & Poor's (S&P), Moody's, and Fitch), and how their rating scales and modifiers differ
- The critical BBB-/Baa3 dividing line between investment grade and speculative (junk) grade, and why it matters for institutional buyers
- Why the lowest investment grade rating uses a minus modifier for S&P/Fitch and a 3 for Moody's, not plus or 1
- What bond ratings measure (default risk, also called credit risk) versus what they do not measure (interest rate risk, liquidity risk, market risk, reinvestment risk)
- The definition of a fallen angel: a bond downgraded from investment grade to speculative grade, specifically BBB-/Baa3 to BB+/Ba1
- Why fallen angels experience price drops beyond what credit deterioration alone justifies, due to institutional forced selling
- How rating downgrades and upgrades affect bond price and yield inversely, and knowing the direction of both moves
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