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What are the advantages of investment-grade bonds? The main advantage is that they carry reduced risk due to their credit ratings assigned by agencies like Moody's and S&P Global. Investment-grade bonds can also generate higher returns than other fixed-income options while providing relatively safe income streams.
Bonds that are believed to have a lower risk of default and receive higher ratings by the credit rating agencies, namely bonds rated Baa (by Moody's) or BBB (by S&P and Fitch) or above. These bonds tend to be issued at lower yields than less creditworthy bonds.
Most bonds are redeemable at par (i.e. redeemed at their face value). Some bonds are callable and can be redeemed prior to the maturity date. These types of bonds are redeemable at premium (i.e. value greater than the face value of the bond). The redemption value is stated as a percentage of face value.
Investment grade and high yield bonds Investors typically group bond ratings into 2 major categories: Investment-grade refers to bonds rated Baa3/BBB- or better. High-yield (also referred to as "non-investment-grade" or "junk" bonds) pertains to bonds rated Ba1/BB+ and lower.
Why interest rates affect bonds. Bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up.
?Yields are fairly high now, and high-quality bonds that you hold to maturity are safe investments,? he said. Mr. Pozen added that well-diversified investment-grade bond funds make sense now, too, for prudent investors who are prepared to hold them for at least three years.