Investment grade bonds are high-quality and low-risk corporate or municipal government bonds with a medium risk rating or better. Credit ratings measure an issuer’s ability to pay debts, and a downgrade can occur if there is a high risk of default. United States Treasury bonds are considered the least risky. Credit scores are not infallible, and investors use multiple factors to determine if a bond is a good investment.
Investment grade generally refers to corporate or municipal government bonds that are considered to be of high quality and relatively low risk. This rating is a credit rating determined by a rating agency, such as Standard & Poor’s (S&P) or Moody’s. Different agencies have various levels of credit ratings. Investment grade bonds generally have a medium risk rating or better.
A bond is a debt that the issuer has to pay to the investor who bought the bond. Issuers pay interest on the bonds, then pay back the original investment in the bond after a set period of time. A credit rating is basically a way of measuring the investment community’s confidence in the issuer’s ability to pay its debts.
When an issuer has too much debt, investors may begin to doubt the issuer’s ability to repay. This can result in lower credit scores. Rating agencies generally use a combination of the letters A and B for investment grade credit ratings. S&P ratings of BBB or higher and Moody’s ratings of Baa or higher indicate investment grade bonds. Bonds receive these high ratings when there is a low risk of default by the issuer of the bond.
An issuer defaults on a bond when it cannot pay the investor any interest due or pay the original amount invested in the bond. A bond that is rated below investment grade is generally referred to as a junk bond. Junk bonds have a high risk of default. There is usually a higher rate of return to compensate the investor for the increased risk of default.
Credit ratings may change based on the financial stability of the issuer. If a rating agency determines that there is a high risk of default, the credit rating may be lowered. When a credit rating is lowered, it is known as a downgraded rating. When the risk has passed and the issuer’s financial condition has stabilized, the credit rating can be raised again.
United States Treasury bonds are considered to be of the highest rating, with the least risk, since they are issued by the federal government. As a result, these bonds do not have credit ratings assigned. For others, investors can usually find the credit rating listed in a prospectus, company literature, or on the issuer’s website. Ratings can also be found on rating agency websites.
Credit scores are not infallible. Issuers can default on investment grade bonds. Bonds may also have different credit ratings assigned by different rating agencies, although they are generally similar. An investment grade credit rating is often just one factor that investors use to determine whether a bond will be a good investment.
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