Investment grade

Definition

Investment grade refers to bonds that are rated at BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's. These bonds are considered to have a lower risk of default, making them suitable for conservative investors.

5 Must Know Facts For Your Next Test

1. Investment grade bonds typically offer lower yields compared to non-investment grade bonds due to their lower risk.
2. Credit rating agencies like Standard & Poor's and Moody's assess the financial stability of issuers to determine bond ratings.
3. A downgrade from investment grade to junk status can significantly affect a bond’s market value and yield.
4. Investment grade bonds are often favored by institutional investors such as pension funds and insurance companies.
5. The interest rate environment can impact the attractiveness of investment grade bonds, with rising rates generally reducing their prices.

Review Questions

• What credit ratings define an investment grade bond?
• Why do investment grade bonds typically offer lower yields than non-investment grade bonds?
• How can a downgrade from investment grade status impact a bond’s market value?

Related terms

Default Risk: The likelihood that a bond issuer will fail to make required payments.

Junk Bonds: Bonds rated below BBB- by Standard & Poor's or Baa3 by Moody's, indicating higher risk.

Yield Spread: The difference in yields between two different debt instruments, often reflecting differences in credit quality.