investment grade
A credit rating of BBB− or higher (S&P/Fitch) or Baa3 or higher (Moody's), indicating a bond is considered safe enough for conservative investors.
Example
“Pension funds are typically restricted to investment grade bonds, avoiding the higher default risk of junk bonds.”
Memory Tip
INVESTMENT GRADE = safe enough to invest in. BBB or better. Below that = junk.
Why It Matters
Investment grade ratings help individual investors quickly assess whether a bond is relatively safe for their portfolio. Understanding this distinction is crucial because it affects the interest rate you receive and the risk of losing your principal investment. Many conservative investors, such as retirees, rely on investment grade bonds to generate stable income without excessive risk.
Common Misconception
People often assume that investment grade bonds are completely risk-free and will never default. In reality, investment grade only means the issuer has a low probability of default, not zero probability. Even highly-rated bonds can lose value if interest rates rise or if the issuer faces unexpected financial difficulties.
In Practice
Suppose you are comparing two corporate bonds: one rated BBB by S&P (investment grade) with a 4 percent yield, and another rated BB (non-investment grade or junk bond) with a 7 percent yield. The higher yield on the junk bond reflects its greater default risk. A conservative investor might choose the investment grade bond despite the lower return because the reduced risk of losing their 10,000 dollar investment outweighs the extra 300 dollars in annual interest income.
Etymology
INVESTMENT (worthy of investing in) GRADE (quality classification). High enough quality to GRADE as investable.
Common Misspellings
Start investing with no commission trades
Related Terms
More in investing
Other investing terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.