What Does Investment Grade Mean? (2024)

Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills, and notes. Most companies receive ratings according to their financial strengths, prospects, and past history. Companies that have manageable levels of debt, good earnings potential, and good debt-paying records will have good credit ratings.

Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or 'Baa" or higher by Moody's. Anything below these 'BBB' or 'Baa" ratings are considered non-investment grade. If the company or bond is rated 'BB' or 'Ba" or lower it is known as junk grade, in which case the probability that the company will repay its issued debt is deemed to be speculative.

Any purchase or sale of bonds, bills or notes, will have an associated credit rating. This rating changes over time as the company's strength and debt load changes. If a company takes on more debt than it can handle or if its earnings outlook weakens, it will lower the company's rating. If it reduces its debt or finds a way to increase potential earnings, the company's rating will usually increase.

Key Takeaways

  • Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills, and notes.
  • Any purchase or sale of bonds, bills or notes, will have an associated credit rating.
  • In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they have a low risk of default.

Which Securities Are Considered Investment Grade?

In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they have a low risk of default. Investment grade is determined based on a relative scale by credit rating agencies such as Standard & Poor's and Moody's. Such credit ratings express the ability and willingness of a borrowing organization to repay its debt and are based on many financial and economic indicators that influence the borrower's creditworthiness. Securities with a rating of BBB or above from Standard and Poor's or Baa3 or above from Moody's are considered investment grade.

Important

In August 2023, Fitch Ratings downgraded the long-term ratings of the United States to "AA+" from "AAA" due to the anticipated fiscal deterioration over the next three years, increasing government debt burden, and the erosion of governance related to 'AA' and 'AAA' rated peers over the last two decades that has resulted in repeat debt limit standoffs and 11th-hour resolutions.

Credit Ratings and Creditworthiness

Credit ratings represent forward-looking statements about the creditworthiness and credit risk of a particular organization in meeting its financial obligations. The credit ratings indicate a default risk for an individual debt, a municipal bond, a government bond or mortgage-backed securities (MBS).

When constructing its rating, the credit rating agency takes into account a myriad of factors to come up with a well-balanced view of credit risk. Leverage, cash flows, earnings, interest coverage ratio, and other financial ratios are common indicators that the credit rating agency considers to assign an investment grade to a specific security.

A security has an investment grade rating if it has a rating that falls within the range of Aaa to Baa3 from Moody's or AAA to BBB- for Standard & Poor's. The company's securities have investment grade ratings if it has a strong capacity to meet its financial commitments.

The rating of BBB- from Standard & Poor's and Baa3 from Moody's represents the lowest possible ratings for a security to be considered investment grade. BBB- and Baa3 ratings indicate that the company that issued such securities has an adequate capacity to meet its obligations, but it can be subject to adverse economic conditions and changes in financial circ*mstances.

The rating of BBB- from Standard & Poor's and Baa3 from Moody's represents the lowest possible ratings for a security to be considered investment grade.

Losing Investment Grade Ratings

It is common for a security to lose its investment grade rating. The reasons for such events vary and can be related to changes in the overall business environment such as recession, industry-specific problems or the company's financial problems.

You should take rankings from credit rating agencies with caution.

If there is a recession, it is likely that many companies are struggling to generate enough cash flow to cover their interest and principal repayments, and credit agencies can lower the rating of companies across sectors. A change in technology or the emergence of a rival within an industry can also warrant downgrades of securities rating from investment grade to speculative grade. Another common reason for the loss of a security's investment grade is due to the company's problems, such as taking too much leverage, problems with collecting on accounts receivable and regulatory changes.

You should take rankings from credit rating agencies with caution. During the financial crisis of 2007-08, it became evident that credit rating agencies misled the public by giving AAA rating to the highly complex mortgage-backed securities market. It turned out that these MBS were high-risk investments and their ratings were soon downgraded to speculative grade from investment grade.

What Is a Bond Rating?

A bond rating is a grade that indicates a bond's creditworthiness. The ratings are a letter grade, sometimes followed by a "+" or "-" and speak to an analysis of the bond issuer's financial wellbeing or capacity to pay a bond's principal and interest.

What Is a Junk Bond?

A junk Bond is a non-investment grade bond. It is considered to be a high risk investment, and therefore offers investors a higher yield to compensate. Junk bond investors can profit, but they are also at greater risk of losing their investment as the underlying companies issuing the bonds tend to have liquidity concerns.

What Are the Main Ratings Agencies?

The three main bond ratings agencies are Moody's, Standard & Poor's, and Fitch Ratings.

The Bottom Line

Investment grade is a measure of a company's credit. Higher rated companies are considered investment grade, suggesting strong underlying fundamentals and a good capacity to pay a bond's principal and interest. Issues that are investment grade are rated as "BBB" or "Baa" or higher by ratings agencies such as Standard & Poor's and Moody's. These bonds are lower yielding than so-called "junk bonds," as they are seen as less of a risk.

What Does Investment Grade Mean? (2024)

FAQs

What Does Investment Grade Mean? ›

An investment grade is a rating that signifies a municipal or corporate bond presents a relatively low risk of default. Bond rating

Bond rating
A bond rating indicates its credit quality and is given to a bond by a rating service. The rating considers a bond issuer's financial strength or ability to pay a bond's principal and interest. Moody's, Standard and Poor's, and Fitch Ratings are well-known bond-rating agencies.
https://www.investopedia.com › ask › answers › bond-rating
firms like Standard & Poor's (S&P), Moody's, and Fitch
Fitch
Fitch Ratings is a credit rating agency that rates the viability of investments relative to the likelihood of default. Fitch is one of the top three credit rating agencies internationally, along with Moody's and Standard & Poor's.
https://www.investopedia.com › terms › fitch-ratings
use different designations, consisting of the upper- and lower-case letters "A" and "B," to identify a bond's credit quality rating.

What is the meaning of investment grade? ›

'Investment grade' refers to the group of credit ratings that imply a low default risk (from AAA to BBB-). Companies with a rating in this range will issue debt at a lower interest rate than others with a poorer credit rating, allowing them to obtain financing more cheaply.

Is B+ investment grade? ›

B1/B+ are one of several non-investment grade credit ratings (also known as "junk") that may be assigned to a company, fixed-income security, or floating-rate loan (FRN). These ratings signify that the issuer is relatively risky, with a higher-than-average chance of default.

What is the lowest level of investment grade? ›

Securities that are rated in the lowest category of investment grade are either rated BBB- by S&P or Baa3 by Moody's. These securities are one downgrade away from being below investment grade.

What is the investment grade spectrum? ›

An investment-grade bond has a grade of AAA, AA, A, or BBB. The ratings agencies use slightly different designations. Standard & Poor's highest rating is AAA while Moody's calls its highest rating Aaa.

What is a grade investment? ›

An investment grade is a rating that signifies a municipal or corporate bond presents a relatively low risk of default. Bond rating firms like Standard & Poor's (S&P), Moody's, and Fitch use different designations, consisting of the upper- and lower-case letters "A" and "B," to identify a bond's credit quality rating.

Is BBB+ a good credit rating? ›

BBB- Considered lowest investment-grade by market participants. BB+ Considered highest speculative-grade by market participants. BB Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.

What is considered below investment grade? ›

Investors typically group bond ratings into 2 major categories: Investment-grade refers to bonds rated Baa3/BBB- or better. High-yield (also referred to as "non-investment-grade" or "junk" bonds) pertains to bonds rated Ba1/BB+ and lower.

Is S&P B investment grade? ›

Investment Grade: AAA, AA, A, BBB (from best quality to good quality but somewhat vulnerable to changing economic conditions). Non-Investment Grade (also referred to as Junk): BB, B, CCC, CC, C (speculative; from the least degree of speculation to the highest degree); D (in payment default).

Is 7 Eleven an investment grade? ›

7-Eleven is given an investment grade Standard and Poor's bond rating of AA- and Moody's long-term rating of Baa1.

What is the cut off for investment grade? ›

The rating of BBB- from Standard & Poor's and Baa3 from Moody's represents the lowest possible ratings for a security to be considered investment grade.

What is the highest quality investment grade? ›

Bond ratings chart
Credit QualityMoody'sStandard & Poor's
Investment Grade (Lowest Risk)AaaAAA
Investment GradeAa1AA+
Investment GradeAa2AA
Investment GradeAa3AA-
18 more rows

What does minimum investment grade rating mean? ›

Minimum Investment Grade Rating means that Guarantor's Affiliate has a minimum credit rating on its senior unsecured debt securities of at least two (2) of the following ratings: (i) BBB- as determined by Standard & Poors Corporation, (ii) Baa3 as determined by Xxxxx'x Investor Service, Inc., or (iii) a comparable ...

What does investment grade mean in real estate? ›

Investment-grade leases are leases to tenants that maintain a credit rating of BBB− or higher. This investment rating is given by S&P's, Moody's, or Fitch, and it represents a company's ability to repay its obligations. BBB− represents a "good credit rating" according to the rating agencies.

What is the difference between investment grade and non-investment grade loans? ›

Higher quality bond issuers (AAA to BBB-) are considered investment-grade or good quality. Issuers with a rating of BB+ to below are seen as riskier, and they are typically referred to as non-investment grade, speculative grade or high yield.

Is high grade the same as investment grade? ›

Bonds that are believed to have a lower risk of default and receive higher ratings by the credit rating agencies, namely bonds rated Baa (by Moody's) or BBB (by S&P and Fitch) or above. These bonds tend to be issued at lower yields than less creditworthy bonds.

What does investment level mean? ›

Investment Level means the portion of the Benchmark Portfolio's assets exposed to Reference Assets, expressed as a percentage of the Benchmark Portfolio NAV. Sample 1Sample 2. Investment Level .

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