According to a 1997 Moody’s study, here are the one-year, weighted-average bond issuer default rates by Moody’s rating for the period 1970-1996:

Rating 1-Yr Default Rate

“Investment

Grade” Aaa 0.00%

Aa 0.03%

A 0.01%

Baa 0.12%

“Speculative

Grade” Ba 1.36%

B 7.27%

As you can see, the difference between Aa and A is quite small, but the default rate jumps very sharply thereafter. High yield “junk” bonds–those usually in the Ba category or lower–carry a high rate of interest to attempt to reward investors for assuming higher default risk.

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