What is the bond rating cutoff for a bond to be classified as a junk bond?

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BlackTom AI · Accepted Answer

The question asks for the bond rating cutoff that classifies a bond as junk. 
Option 1: 'BB and below' — This aligns with the common standard that junk bonds are non-investment-grade, i.e., rated below investment grade. Ratings such as BB, BB-, B+, etc. fall into the non-investment or junk category in many rating systems (S&P and Moody's use related scales where anything below BBB- is considered non-investment grade). So this option correctly identifies the boundary yearned for junk status. 
Option 2: 'AAA and below' — AAA is the highest, most secure rating and corresponds to the best quality. Including 'and below' would sweep in nearly all lower-quality bonds and would not correctly delineate junk from investment-grade bonds. This makes the statement factually incorrect for the junk cutoff. 
Option 3: 'BBB and below' — BBB is generally considered investment grade (with BBB- being the lower threshold). Saying 'BBB and below' would incorrectly include some investment-grade bonds as junk, which contradicts standard definitions. Therefore this option misidentifies the boundary. 
Option 4: 'D and below' — A D rating indicates default or near-default conditions. This is far beyond junk status and represents default, not the junk bond cutoff. It does not describe the classification boundary for non-investment-grade bonds. 
In summary, Option 1 correctly captures the widely used cutoff for junk bonds, while Options 2, 3, and 4 misstate the boundary by either including too much (investment-grade) or by referring to an extreme state (default).

MSB-250-300-002 Proctored Midcourse Exam 2

What is the bond rating cutoff for a bond to be classified as a junk bond?

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MSB-250-300-002 Proctored Midcourse Exam 2

What is the bond rating cutoff for a bond to be classified as a junk bond?

View Explanation

Log in for full answers

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A(n) ________ corporate bond will pay a ________ return.

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A(n) corporate bond will pay a return.

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