Investment grade

A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's investment grade 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 are commonly referred to as "junk bonds".

Investopedia Says:
Investors should note that government bonds, or Treasuries, are not subject to credit quality ratings. These securities are considered to be of the very highest credit quality. In the case of municipal and corporate bond funds, fund company literature, such as the fund prospectus, and independent investment research reports on a bond fund will report an "average credit quality" for the fund's portfolio as a whole.

The rating on a company's debt may fall from investment grade to "junk" if a substantial change takes place. Therefore, ssafety-conscious investors should pay attention to a bond's credit quality breakdown.

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Term used to describe bonds suitable for purchase by prudent investors. Standard & Poor's rating service designates the bonds in its four top categories (AAA down to BBB) as investment-grade. In their Fiduciary roles, institutional investors, such as pension funds, insurance companies, and banks, must maintain a certain level of credit quality in the bond portfolios they purchase, so they tend to buy mostly investment-grade bonds. Contrast with Junk Bond.

Description of a high-quality corporate or municipal bond, assigned a rating of AAA to BBB by Standard & Poor's and Fitch's Investors Service. (Moody's Investors Service assigns ratings of Aaa and Baa, respectively.) Investment grade securities are those rated Baa or better or BBB or better. These bonds are considered suitable investments for banks, trust departments, and fiduciaries, such as pension funds. U.S. Treasury securities and federal agency securities are also considered investment quality securities for financial institutions. Bonds rated lower than BBB may often carry a higher yield, but are speculative investments. See also Junk Bond.

A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's or BBB(low) or higher by DBRS. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them.

Ratings play a critical role in determining how much companies and other entities that issue debt, including sovereign governments, have to pay to access credit markets, i.e., the amount of interest they pay on their issued debt. The threshold between investment-grade and speculative-grade ratings has important market implications for issuers' borrowing costs.

Bonds that are not rated as investment-grade bonds are known as high yield bonds or more derisively as junk bonds.

The risks associated with investment-grade bonds (or investment-grade corporate debt) are considered noticeably higher than in the case of first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. It is an indicator for the market's belief in the stability of the economy. The higher these investment-grade spreads (or risk premiums) are, the weaker the economy is considered.

Moody's		S&P		Fitch
Long Term	Short Term	Long Term	Short Term	Long Term	Short Term
Aaa	P-1	AAA	A-1+	AAA	A1+	Prime
Aa1		AA+		AA+		High grade
Aa2		AA		AA
Aa3		AA−		AA−
A1		A+	A-1	A+	A1	Upper Medium grade
A2		A		A
A3	P-2	A−	A-2	A−	A2
Baa1		BBB+		BBB+		Lower Medium grade
Baa2	P-3	BBB	A-3	BBB	A3
Baa3		BBB−		BBB−
Ba1	Not Prime	BB+	B	BB+	B	Non Investmentgrade speculative
Ba2		BB		BB
Ba3		BB−		BB−
B1		B+		B+		Highly Speculative
B2		B		B
B3		B−		B−
Caa		CCC+	C	CCC	C	Substantial risks
Ca		CCC				Extemely speculative
C		CCC−				In default with little prospect for recovery
/		D	/	DDD	/	In default
/				DD
/				D

External links

• [1] "Time to go shopping?" - The Economist, March 23rd 2008

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