Investment Grade
Investment grade refers to bonds rated BBB-/Baa3 or higher by credit rating agencies, indicating lower default risk and greater creditworthiness compared to high-yield (junk) bonds.
Exam Tip
Investment grade = BBB-/Baa3 and ABOVE. Below that = junk/high-yield. Know the dividing line!
What is Investment Grade?
Investment grade is a credit rating category that indicates a bond issuer has a relatively low risk of default. These bonds are considered safer and are suitable for conservative investors and institutional portfolios.
Credit Rating Scales
| Rating Agency | Investment Grade | Highest Quality |
|---|---|---|
| S&P | BBB- and above | AAA |
| Moody's | Baa3 and above | Aaa |
| Fitch | BBB- and above | AAA |
Investment Grade vs. High Yield (Junk)
| Category | S&P/Fitch | Moody's | Characteristics |
|---|---|---|---|
| Investment Grade | BBB- to AAA | Baa3 to Aaa | Lower risk, lower yield |
| High Yield (Junk) | BB+ to D | Ba1 to C | Higher risk, higher yield |
Full Rating Scale
| Grade | S&P/Fitch | Moody's | Description |
|---|---|---|---|
| Highest | AAA | Aaa | Extremely strong capacity to pay |
| High | AA | Aa | Very strong capacity |
| Upper Medium | A | A | Strong capacity |
| Medium | BBB | Baa | Adequate capacity |
| --- | --- | --- | Line between IG and Junk |
| Speculative | BB | Ba | Less vulnerable short-term |
| Highly Speculative | B | B | More vulnerable |
| Poor | CCC | Caa | Currently vulnerable |
| Default | D | C | In default |
Who Invests in Investment Grade?
| Investor Type | Why Investment Grade |
|---|---|
| Pension Funds | Often required by mandate |
| Insurance Companies | Regulatory capital requirements |
| Banks | Lower risk weights |
| Conservative Investors | Capital preservation focus |
Investment Grade Characteristics
| Characteristic | Description |
|---|---|
| Lower Yields | Less compensation for lower risk |
| Lower Volatility | More stable prices |
| Higher Liquidity | More buyers and sellers |
| Lower Default Rates | Historically < 1% annually |
"Fallen Angels"
Bonds that were investment grade but got downgraded to junk status:
- Creates forced selling (some funds can't hold junk)
- May create buying opportunities
- Examples: Ford, GM (at various times)
Exam Alert
Investment grade = BBB-/Baa3 or higher. This is the LINE between IG and junk. Know the major rating agencies (S&P, Moody's, Fitch) and their scales. Many institutional investors can ONLY hold investment grade.
Study This Term In
Related Terms
Bond
SecuritiesA bond is a fixed-income debt security where the issuer owes the holder a debt and pays interest (coupon) plus principal at maturity.
Junk Bond (High-Yield Bond)
SecuritiesA junk bond is a corporate bond rated below investment grade (BB+/Ba1 or lower) that offers higher interest rates to compensate investors for the increased risk of default.