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B-/B3 — credit rating

B-/B3 — credit rating

B- — S&P / Fitch
B3 — Moody’s

In the world of junk bonds, a B3/B- rating is about as low of a rating as most investors will venture to explore.

Bonds are rated by independent ratings institutions known as the Big Three: Moody’s, Fitch, and S&P. Two companies, S&P and Fitch, use the same symbols, and the B- in this example belongs to them. Moody’s has its own system, and the B3 in this example is theirs.

The ratings are used for companies, insurers, as well as bond issues. Investment Grade bonds range from AAA/Aaa to BBB-/Baa3, and Junk bonds (aka High Yield Bonds) fall in below that, ranging from Ba1/BB+ to D/DDD.

The rating in question here, B3/B-, is on the low end of the “Highly Speculative” subset.

The risk of an issuer defaulting, or not making the bond interest payments in a timely manner, is over 20%, with only 20% or so of those who defaulted resuming payments later (the “recovery rate”). To make this a risk worth taking, issuers of these bonds must make their yields relatively high compared to the investment grade, low-risk bonds.

This higher rate is known as the risk premium, and how much more the premium is for a given amount of risk depends on market conditions, including how high the risk-free rate of 10-year Treasuries is.

What is a Credit Rating?
What are Bond Ratings?

Keywords: treasuries, credit rating, junk bonds, S&P, high yield bonds, Moody's, Fitch, investment grade bonds, default rate, recovery rate, risk free,