Credit rating. Credit rating is an assessment of the credit worthiness of a borrower in terms of their ability to repay debt. It's a key navigational point for investors, but while it's an essential guide, professional credit investors often sail beyond performing additional detailed analysis to identify whether bonds offer good rewards for the additional risk taken.

But let's stick to credit ratings here and first answer the question, what is a credit rating? Think of it as a grade given to a bond that assesses the issuer's ability to repay its debt. It's neither a guarantee nor a buy or sell recommendation, but rather a widely recognized opinion that gauges the risk level of the bond. Ratings are provided by agencies like Standard and Pause, Moody's and Fitch, and they range from high quality triple A to default D, depending on the credit rating, debt instruments are often categorized into investment grade and high yield debt. Let's first of all talk about investment grade or IG bonds. These are the honor students of the bond world with ratings from Triple A down to Triple B minus, they are seen as stable and reliable with a low risk of default. Issuers are typically established financially, sound companies or governments. Because of their stability, they offer lower yields compared to their riskier counterparts. On the flip side, we have high yield or HY debts, often referred to as speculative grade or even junk bonds.

These are bonds that carry a higher risk of default and thus have to offer higher yields to attract investors. Their credit ratings are BB plus or below. Why does this matter? Well, it's because the distinction between IG and HY impacts who can invest in those bonds. Many institutional investors, such as pension funds and certain mutual funds, are restricted to holding only investment grade debt due to mandates or risk tolerance policies. This means that the pool of investors for high yield debt is smaller, which can lead to even higher returns for those willing to take on the additional risk. Investment grade bonds are considered a safer investment compared to high yield bonds, but with that safety comes a trade off in the form of lower returns, high yield bonds, while riskier can be a valuable addition to a well diversified portfolio offering the potential for higher income.