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Question:

Ann Lloyd, CFA, observes that a 3-year senior unsecured bond of Hawk, Inc. has a rating of Baa3/BBB– and a 3-year senior unsecured bond of Osprey, Inc. has a rating of Ba1/BB+. Based only on this information, Lloyd can most appropriately conclude that:

A The Hawk bond is investment grade and the Osprey bond is non- investment grade.
explanation

The classifications "investment grade" and "non-investment grade" are based on ratings from recognized credit rating agencies. Bonds rated Baa3/BBB– or higher are classified as investment grade, while bonds rated Ba1/BB+ or lower are classified as non-investment grade. However, an analyst should not rely exclusively on credit ratings to draw conclusions about the credit risk or loss severity of bond investments.

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