Evaluating Credit Ratings and Default Risk

When evaluating fixed income securities, investors often rely on credit ratings provided by agencies such as S&P, Moody's, and Fitch. These ratings assess the credit risk associated with bond issuers and their debt securities. A recent study indicated that corporate bonds rated 'A' exhibit a default probability of around 2% over a ten-year horizon, while bonds rated 'B' have a significantly higher default probability of approximately 10% within the same period. Understanding these ratings can help investors make informed decisions regarding risk and return.

Given this context, which of the following statements concerning credit ratings and their implications on investment strategy is TRUE?