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 ________.

Question

BlackTom AI · Accepted Answer

Examining the question, we need to fill in the blanks with the standard terminology for bond risk categories and ratings.
Option A: 'high quality; junk' This is inconsistent with ratings terminology. 'High quality' typically corresponds to investment-grade, not junk. Calling bonds 'high quality' while labeling them as 'junk' creates a contradiction with how ratings distinguish these categories.
Option B: 'investment grade; lower grade' The first blank is close to correct, since 'investment grade' refers to relatively low default risk, but the second blank should denote the more risky category. 'Lower grade' is not the standard formal term used for the high-risk end; the typical term is 'junk bonds' or 'high-yield bonds', not just 'lower grade'.
Option C: 'high quality; lower grade' Here again the first adjective 'high quality' would align with low risk, but the second term 'lower grade' is not the conventional label for bonds with higher default risk. The standard term for the higher-risk end is 'junk bonds', making this option improperly paired.
Option D: 'investment grade; junk bonds' This option uses the established pair: bonds rated Baa/BBB and above are called investment grade, reflecting relatively low default risk; bonds rated below Baa/BBB are considered non-investment-grade and are commonly termed junk bonds, reflecting higher default risk. This aligns with widely used classifications in fixed income.
In summary, the correct pairing is investment grade for the lower-risk segment and junk bonds for the higher-risk segment, which best matches the standard definitions used in bond rating frameworks.

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 .

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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 ________.