Understanding Investment Grade and High Yield Bonds

Bonds are one of the most efficient instruments of raising capital, used by corporate institutions around the world. Different credit rating agencies assign a certain credit score to every corporate bond. You can use these scores to analyse the creditworthiness of these bonds and take appropriate investment decisions. 

Based on their credit ratings, corporate bonds are divided into two categories – investment grade and high yield bonds. The former is a low risk bond, whereas the latter is highly risky but can offer greater returns. In this article, we will discuss the working of these bonds and their other aspects. 

What Are Investment Grade Bonds?

Investment grade bonds are low risk debt securities, and subsequently, the return potential on these bonds is low to moderate. However, these come with very high credibility and lower chances of default. 

They come with some of the highest credit ratings given by various credit rating agencies. As the risk associated with these is quite less, they can be an ideal investment alternative for conservative investors. However, as the risk quotient is less in these bonds, interest rates offered by issuers are quite less than other bonds. 

What Are High Yield Bonds?  

As the name suggests, these bonds tend to offer a higher yield when compared to other corporate bonds. The high yield is mainly due to the high risk factor associated with them. A high-yield bond comes with a lower credit rating assigned by various credit rating agencies.

The high returns on these bonds serve as compensation for the higher risk; it’s a way to increase their attractiveness among different investors. Usually, issuers of these bonds are capital-intensive companies having a significantly higher debt-to-capital ratio. 

Also called junk bonds, these instruments witness heavy price volatility and carry a higher chance of default. 

Now that you are aware of what are investment grade and high-yield bonds, let’s jump to other sections like their benefits, features, etc. 

What Are the Benefits of Investment Grade Bonds?

Here are some advantages associated with investment-grade bonds: 

  • Low Risk 

It is a low risk debt instrument when compared to other investment options like stocks and mutual funds. As credit ratings of these bonds are quite high, it has low chances of default. Therefore, in most cases, your money is secured. The risk level is also lower than the risk associated with stocks. This is because of lower price fluctuations as compared to stocks. 

  • Fixed Income Source

Another advantage associated with these bonds is that it offers a fixed income stream in the form of coupon payments. You, as a bondholder, have the legal right to receive regular interest income. In case of any violation, there are legal platforms where you can go with your grievances. You can convey your grievances to the complaint cell of Reserve Bank of India in case of government bonds, and reach out to SEBI for complaints regarding corporate bonds.  

What Are the Advantages of High Yield Bonds?

Some advantages of investing in high-yield bonds are as follows: 

  • High Returns 

These bonds offer one of the highest returns among all the debt instrument categories. It can be quite beneficial for you if you are seeking aggressive returns on your investments. The high returns serve as compensation for the significant risks that these bonds come with. 

  • Low sensitivity to interest rates

Another advantage of these bonds is that they have a lower vulnerability towards fluctuation in interest rates. Hence, you can use them for diversification of your total investment basket and provide greater resilience to your portfolios.   

Credit Ratings of Investment Grade and High Yield Bonds 

Here are the various ratings given to investment grade and high yield bonds by the top credit rating agencies in India: 

Grade ICRACRISILIndia Research Ratings 
Investment grade bonds AaaAAAIND AAA
Investment grade bonds Aa1AA+IND AA
Investment grade bonds Aa2AAIND A
Investment grade bonds Aa3AA-IND BBB
Investment grade bonds A1A+IND A1
Investment grade bonds A2AIND A2
Investment grade bonds A3A-IND A3
Investment grade bonds Baa1BBB+IND AAA (SO)
Investment grade bonds Baa2BBBIND AA (SO)
Investment grade bonds Baa3BBB-IND A (SO)
Non-investment grade bonds  Ba1BB+IND A4
Non-investment grade bonds  Ba2BBIND BB
Non-investment grade bonds  Ba3BB-IND BB(SO)
Non-investment grade bonds  B1B+IND B (SO)
Non-investment grade bonds  B2BIND C (SO)
Non-investment grade bonds  B3B-IND D (SO)
Non-investment grade bonds  CaaCCCIND A4 (SO)
Non-investment grade bonds  CaCCIND C
Non-investment grade bonds  CCIND D
Non-investment grade bonds  D

Final Word 

Investment grade and high-yield bonds are two categories of corporate bonds based on risk profile. If you are looking to invest in these bonds, it is important that you consider your investment objectives, risk appetite and taxation before making any decision. 

Frequently Asked Questions 

Q1. Which credit rating agencies in India rate corporate bonds? 

Ans. There are several credit rating agencies in India that indulge in assigning ratings to corporate bonds. Some of them are ICRA, CRISIL, India Ratings and Research and CARE Ratings. 

Q2. How does the economic situation influence bonds?

Ans. Whenever a nation is facing economic hardships or crisis, investors tend to move towards investment-grade bonds that are comparatively more stable. On the other hand, when the economy is undergoing a boom, the demand for high-yielding bonds starts rising. 

Q3. What is the impact of interest rates on a bond’s rating?

Ans. Bonds with a higher tenure or maturity period are more sensitive to changes occurring in market interest rates as compared to bonds with a lower duration. Investment grade bonds have a longer duration, and therefore their ratings can change significantly in times of interest rate volatility. 

Q4. Are investment-grade bonds a good investment option?Ans. Investment-grade bonds can be a good investment option for you if you are a conservative investor. If you have a low risk appetite and cannot afford to incur losses on your portfolio, you can opt for investing in these types of bonds.

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.

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