Bond Ratings

What this video covers

• The three major credit rating agencies: Standard & Poor's (S&P), Moody's, and Fitch, and how the issuer-pay model creates potential conflicts of interest
• How S&P and Fitch use plus and minus modifiers while Moody's uses 1/2/3 modifiers, and why you cannot mix the two systems
• The investment-grade dividing line at BBB-/Baa3, and what happens when a bond falls to BB+/Ba1 or below
• Why a single-notch downgrade across the investment-grade boundary triggers forced institutional selling and a disproportionately large price drop
• The inverse relationship between rating changes, price, and yield: upgrades raise price and lower yield, while downgrades lower price and raise yield
• What credit spread (yield spread) measures: the yield difference between two rating categories
• Why credit spreads widen during economic downturns (flight to quality) and narrow during expansions