Investment Grade
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20-Oct-2014 -
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Transcript of Investment Grade
Just what does investment grade mean? The term refers
to bonds. Bond rating agencies, Standard and
Poor’s, Moody’s, Fitch and DBRS rate the credit
worthiness of borrowers.
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Each has a cutoff below which an investment
(corporate bond, municipal bond, country’s credit rating, etc.) is considered too risky
for safe investment.
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In general bonds that are investment grade are OK for
bond investing by banks. Investment grade to Standard and Poor’s and Fitch is BBB- and above. To Moody’s it is
Baa3 and above.
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To DBRS it is BBB and above. Investors and traders use high grade bonds to lower
investment risk. A low credit rating will require that a
company or country pay a higher rate of interest than a company or country with an
investment grade rating.By: www.CandleStickForums.com
When the investor decides to buy bonds he or she will
decide whether to invest in a low risk bond at a lower rate of interest or a so called junk bond offering a higher rate of
return on investment.
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Stocks and bonds are similar in that market volatility will
affect both. Traders engaging in bond trading will often opt
for higher risk bonds with more volatile interest rates. As the interest rate varies so
does the bond price.
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Determination whether of not the investment risk of a bond is investment grade or not is
a laborious process that considers all factors that will
determine if a borrower might default on payment.
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In long term investing it is often the case that the investor will opt for the
highest grade in order to protect investment capital. Learning to invest in bonds starts with understanding
credit ratings.
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Investment grade bonds are typically found in a
conservative investment portfolio. High yield bonds with less than investment grade ratings are more
typically the tool of short term trading.
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A bond is issued at a given interest rate determined by
the market. When the prevailing interest rate goes up the value of the bond goes down. When interest rates go down the value of the bond
goes up.
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A trading strategy for bonds might be to purchase bonds
in anticipation of a fall in interest rates. The trader will not hold the bonds long term
but sell for a profit based upon fundamental and
technical analysis of interest rates.
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Although a long term investor in bonds may not buy and sell bonds as frequently as a day
trader he or she will often use both fundamental analysis and technical analysis to
determine when the optimal time will be to sell a set of bonds in a market of slowly
dropping interest rates.By: www.CandleStickForums.com
This was a very profitable strategy for many during the
1980’s as rates slowly but surely dropped over the
decade.
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The use of Candlestick chart analysis can be useful in
following interest rates and bond rating prospects just as
it is for trading stocks, trading options, or trading
commodities.
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In using Candlestick charts the trader will be able to
track interest rates but also the company which has
issued bonds.
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Not only will prevailing interest rates affect the price
of a bond but a recovering company that borrowed
money may benefit from a movement back to investment
grade and find its bonds selling at a higher price.
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