Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

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BlackTom AI · Accepted Answer

Let's break down the statement and test it against standard credit rating conventions. The sentence says: bonds rated below Baa by Moody's or BBB by S&P are junk bonds. First, consider Moody's ratings: Baa is the lower bound of investment-grade bonds in Moody's scale (Aaa, Aa, A, Baa). Bonds rated below Baa (i.e., Ba and lower) are indeed considered speculative or junk by Moody's. So, for the Moody's portion, the claim holds: anything below Baa is junk.

Next, examine the S&P side: BBB is the lower end of investment-grade ratings in S&P's scale (AAA, AA, A, BBB). However, the boundary for junk status in S&P is below BBB-, not below BBB. That is, BBB- and above are investment grade, while junk begins at BB+ and below. Therefore, stating that bonds rated below BBB by S&P are junk would misstate the cutoff, since BBB- itself is still investment grade and would not be considered junk, whereas the range starting at BBB is just above that threshold. In other words, the S&P portion of the sentence uses the wrong cutoff point for junk status.

Putting these together, the Moody's portion correctly identifies junk below Baa, but the S&P portion incorrectly claims that anything below BBB is junk, whereas the correct threshold is below BBB- (i.e., BBB- and above remains investment grade). The mixed accuracy means the overall statement is not an accurate universal rule across both agencies, given the precise S&P cutoff. Consequently, one should question the validity of the claim as stated.

To summarize the potential misunderstandings: - Moody's: below Baa = junk is true. - S&P: below BBB is not the standard cutoff for junk; the standard is below BBB- (BBB- and above are investment grade). Therefore, interpreting the entire sentence as a true universal rule would be misleading because it conflates two different rating band boundaries.

These nuances are essential when evaluating credit ratings, as investment-grade thresholds differ slightly between agencies and depend on the exact notch used (BBB vs BBB- in S&P).

Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

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Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

View Explanation

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Similar Questions

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A(n) corporate bond will pay a return.

Bonds with relatively low risk of default are called securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called .