The Impact of Credit Ratings on Bond Yields
Yalan Lei
Co-Presenters: Individual Presentation
College: College of Business and Public Management
Major: Finance
Faculty Research Mentor: Huaibing Yu
Abstract:
Credit ratings are important indicators of credit risk and play a key role in how investors evaluate bonds. This study explores the relationship between credit ratings and corporate bond yields in the U.S. market from 2020 to 2024, using both market data and a real-world example.We analyzed AAA- and BAA-rated bond yields using data from the Federal Reserve’s FRED database. Results show that bonds with lower credit ratings consistently had higher yields, and the spread between ratings widened during periods of market stress, such as the COVID-19 pandemic and rate hike cycles. This reflects the increased risk premium investors require when uncertainty is high.To further demonstrate this effect, we studied Ford Motor Company. After being downgraded to junk in 2020, Ford’s yields rose to nearly 9%. Following its return to investment grade in 2023, yields dropped to around 4%.Our findings confirm that credit ratings significantly impact borrowing costs and investor returns. Companies benefit from maintaining strong credit profiles, and investors should consider rating risk when assessing bond investments.