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Intermediate · Lesson 3 of 5Credit risk and ratings
Credit risk is the chance the issuer does not pay. Agencies such as S&P, Moody's and Fitch rate issuers. Investment grade runs from AAA down to BBB- (Baa3); below that is high-yield ("junk").
The credit spread is the extra yield over a government bond of the same maturity. Spreads widen in recessions as default fears rise, so corporate bonds often fall alongside shares in a crisis.
Ratings can be wrong: many mortgage securities rated AAA before 2008 suffered heavy losses. Diversify across issuers and do not rely on yield alone.
Key takeaways
- Investment grade = BBB- and above.
- Credit spreads widen in downturns.
- Ratings are opinions, not guarantees.
Check your understanding
1. Which rating is the lowest investment grade (S&P scale)?
- AAA
- A
- BBB-
- BB+
Show the answer
BBB-. BB+ and below is high yield.
2. In a recession, corporate credit spreads usually...
- Narrow
- Widen
- Disappear
- Stay fixed
Show the answer
Widen. Investors demand more for higher default risk.
Go deeper
- Wikipedia: Credit rating
- YouTube videos: credit ratings credit spread explained
- Investopedia: credit spread
- Wikipedia: High-yield debt
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