BB — S&P / Fitch
Ba2 — Moody’s
A bond rated BB/Ba2 is just below investment grade and is a somewhat speculative financial instrument.
Fitch, Moody’s, and Standard & Poor’s (S&P) are the Big Three major credit ratings institutions. They each have proprietary formulas for assessing the financial strength and creditworthiness of companies, municipalities, insurers, and bond issues, The most common use of these ratings is for bonds, as investors seek to learn how likely it is that a bond will default on its payments.
A rating of BB/Ba2 is just over the threshold in High Yield Bond territory, one rank below the lowest Investment Grade bond rating.
This means that a bond issuer may have about a 20% chance of defaulting on its payment obligations for a particular bond issue. These ratings are also used for companies, municipalities, and insurers, but it is worth noting that a rating for a specific bond issue is separate from the rating of the company issuing it.
Bond ratings can be improved by backing the bond with collateral to which the investors have a claim, or covering the bond with surety insurance. High yield bonds offer a higher payout than their more conservative investment grade counterparts since investors need to be compensated to take on the additional risk.
This additional amount is called the risk premium, and it is a paradigm found all over the investment world.
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