Canadian Securities Course (CSC) Level 1 Practice Exam

How are bonds rated?

1. Rating based on the issuer's age

2. Rating based on market trends

3. Rating alphabetically, from A to Z

4. AAA being the best, C being the worst rated.

The correct answer is: AAA being the best, C being the worst rated.

Bonds are rated primarily based on the creditworthiness of the issuer, reflecting their ability to meet debt obligations. The ratings typically use a letter scale, where "AAA" signifies the highest level of credit quality, indicating a very low risk of default, and "C" represents a significantly higher risk of default, denoting the lowest rating category. This system is crucial for investors as it provides a guide on the safety and risk associated with investing in a particular bond. Credit rating agencies like Standard & Poor’s, Moody's, and Fitch provide these ratings, which can affect interest rates and repute in the marketplace. The system helps in making informed investment decisions, as higher-rated bonds generally offer lower yields due to their lower risk, while lower-rated bonds must offer higher yields to attract investors who take on more risk. Other options do not accurately describe the bond rating system. Age of the issuer and market trends are not direct measures of credit risk, and while alphabetic ratings are involved, they are not as simplistic as A to Z. The proper grading scale involves nuances within those ratings, especially with pluses and minuses that further differentiate credit quality within categories.