Investment Grade

Investment grade

In the context of bond ratings, the rating level above which institutional investors have been authorized to invest.

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Investment Grade

Describing a bond with a medium or high rating. Bonds rated Baa3 by Moody's or BBB- by S&P or Fitch. Investment-grade bonds are considered sufficiently low-risk that the law allows banks to invest in them. In addition to being low-risk, investment-grade bonds are low-return, greatly reducing the cost on the issuer. Most American Treasury and municipal bonds are investment-grade. See also: Junk, High-Rating.

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Investment grade. When a bond is rated investment grade, its issuer is considered able to meet its obligations, exposing bondholders to minimal default risk.

Most US corporate and municipal bonds are rated by independent services such as Moody's Investors Service and Standard & Poor's (S&P).

The ratings are based on a number of criteria, including the likelihood that the bond issuer will be able to make interest payments and repay the principal in full and on time.

The four categories of bonds rated BBB and higher by S&P or Baa and higher by Moody's are considered investment grade.

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Investment Grade

What Does Investment Grade Mean?

A rating that is assigned to a municipal or corporate bond that indicates its creditworthiness and likelihood of default. Bond rating firms such as Standard & Poor's, use different designations consisting of the uppercase and lowercase letters A and B to identify a bond's credit quality rating. AAA and AA (high credit quality) and A and BBB (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (BB, B, CCC, etc.) are considered low credit quality and thus are referred to commonly as junk bonds.

Investopedia explains Investment Grade

Investors should note that government bonds, or Treasuries, are not subject to credit quality ratings because they are considered to have the very highest credit quality. In the case of municipal and corporate bond funds, a fund prospectus and independent investment research reports will report an “average credit quality” for a fund's portfolio as a whole. Investors should be aware that an agency downgrade of a company's bonds from BBB to BB reclassifies the company's debt from investment-grade to junk status with just a one-step drop in quality. The repercussions of such an event can be highly problematic for the issuer and also adversely affect bond prices for investors. Safety-conscious fund investors should pay attention to a bond fund's portfolio credit quality breakdown.

Related Terms:
• Bond
• Bond Rating
• Credit Rating
• Fundamental Analysis
• Junk Bond