07 August 2015

Bond Trading: Ratings and Credit Quality

How to assess the credit quality and rating of bonds. Find out more.

​​​​​​​​Assessing the Credit Quality of an Issuer

The Credit Quality of an Issuer is normally expressed by a Rating from one or more Rating Agencies.

Bonds are divided into two main categories based on their Rating: Investment Grade Bonds and High Yield Bonds and within these two categories there are several sub categories.

Below there is an non-exhaustive overview of the ratings provided by the three major Credit Rating agencies and the categories.

high-yield-bonds.JPG 

The Credit Quality is a determining factor when pricing a Bond. The higher the Credit Quality, the higher the price and lower yield. In the example below, you can see how changes in Rating have an effect on the price.

The chart below shows the price of the Nokia 5.375% May 2019 Bond during 2012.

The sharp decline in the price from mid-April, is due to a Q1 earnings release and downgrades by the Rating agencies.

Nokia went from being an 'Investment Grade' to a 'High Yield' Bond issuer.

nokia-high-yield.JPG 

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products.
Please ensure you understand the risks.

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.