Polls / June 2, 2011

Do you know what a "junk bond" is?

About a quarter – or 24% – of respondents to the latest eZonomics online poll know what a “junk bond” is, while 76% are not so sure.

Investment grade or junk?
So-called “junk” status refers to a credit rating. As the eZonomics story What is … a credit rating agency? explains, Moody’s, Standard & Poor’s, Fitch and other credit rating agencies assign 22 grades of rating – from triple-A to D – to countries and financial institutions that issue debt. Grades below BBB- (also known as Baa3) are deemed to be below investment grade and are known as “junk”. The grades signal the degree of risk of failing to pay back money loaned from investors.

Columbia is on the up – and Greece is being cut
Ratings move higher or lower depending on circumstances. The Financial Times beyondbrics wrote, for example, that this week Moody’s upgraded Colombia’s foreign currency debt from junk bond status to the lowest investment grade level. On the other hand, Moody’s cut its credit rating of Greece three notches this week to Caa1, writes the BBC, well into the “junk” rating zone. The lower rating typically pushes up the cost of borrowing, as lenders take on more risk of a default.

Should I invest in a junk bond?
Credit ratings influence personal finance in many ways. Changes to credit ratings can see stock markets and bond yields rise or fall. The agencies also rate individual financial products and can act as a guide when weighing the risks and benefits of investing money.