Investment Grade
IntermediateInvestment grade is a credit rating category for bonds and borrowers considered to have a relatively low risk of default, defined as BBB- or higher by S&P and Fitch, or Baa3 or higher by Moody’s.
Credit rating agencies divide ratings into two broad groups. Investment-grade ratings, from AAA down to BBB-, indicate stronger ability to repay. Ratings below this level are called high yield or speculative grade.
The distinction has important practical effects. Many pension funds, insurers and other institutional investors are restricted by their rules or regulations to holding mainly investment-grade bonds. Investment-grade issuers can usually borrow at lower interest rates.
For example, a large, stable utility company rated A might borrow at only slightly more than the government, while a company rated BB would pay considerably more.
When a company is downgraded from investment grade to high yield, it becomes a fallen angel, and some investors may be forced to sell its bonds, which can push prices down sharply. Companies rated BBB, at the lowest level of investment grade, are watched closely for this risk. Investment grade does not mean risk-free, and investment-grade issuers can still default, although this is rare.
For worked examples and full lessons, visit notesbysara.org.