A:

Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills and notes. Most companies are issued a rating based on their financial strength, future prospects and past history. Companies that have manageable levels of debt, good earnings potential and a good debt-paying records will have good credit ratings.

Investment grade refers to the quality of a company's credit. In order to be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's. Anything below this 'BBB' rating is considered non-investment grade. If the company or bond is rated 'BB' 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 time that you purchase or sell bonds, bills or notes, they 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, the company's rating will be lowered. If it reduces its debt or finds a way to increase potential earnings, the company's rating will usually increase.

To read more on this topic, see What Is A Corporate Credit Rating, Junk Bonds: Everything You Need To Know and High Yield, Or Just High Risk?

RELATED FAQS
  1. How are junk bonds rated differently by Standard & Poor's and Moody's?

    Learn how credit rating agencies rate bonds with junk bond status, and understand how downgrade risk can impact the price ... Read Answer >>
  2. Which securities are considered investment grade?

    Learn which securities are considered investment grade by credit rating agencies such as Standard & Poors and Moody's and ... Read Answer >>
  3. What are the highest-yielding investment grade bonds?

    Learn how Standard & Poor's and Moody's rate bonds. Understand what investment grade bonds offer the best yield. Read Answer >>
  4. How can I tell if a security is considered investment grade?

    Understand how Standard & Poor's and Moody's rates securities. Learn what types of ratings types go into evaluating the investment ... Read Answer >>
  5. Where can I find information about corporate bond issues?

    Learn information about corporate bond investments, including where investors can access information about new corporate ... Read Answer >>
  6. How do I compare one junk bond to another?

    Discover how to identify, select and compare junk bonds. Learn the role that risk, yield and opportunity cost play in investing ... Read Answer >>
Related Articles
  1. Investing

    What does Investment Grade Mean?

    Investment grade is a term used to describe a favorable rating for corporate and municipal bonds.
  2. Bonds & Fixed Income

    Four Ways to Increase Your Corporate Bond Exposure

    Looking at the corporate bond market over the past few years, we see that there has been a growing demand for both investment grade and high yield corporate bonds.
  3. Credit & Loans

    Explaining Credit Ratings

    A credit rating is a third-party assessment about the creditworthiness of an individual or entity.
  4. Personal Finance

    The Debt Ratings Debate

    Lack of competition and potential conflicts of interest have called the value of these ratings into question.
  5. Bonds & Fixed Income

    Why Bad Bonds Get Good Ratings

    Credit ratings are not the only tool to rely on when assessing bonds. Find out why they sometimes fall short.
  6. Retirement

    Bond Basics: Characteristics

    Bonds have a number of characteristics of which you need to be aware. All of these factors play a role in determining the value of a bond and the extent to which it fits in your portfolio. Face ...
  7. Credit & Loans

    Understanding Credit Risk

    Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt.
  8. Investing

    The Power of Major Credit Rating Agencies

    The performance of major independent credit rating agencies is a controversial topic, particularly due to the strength of their influence.
  9. Investing Basics

    What's a High-Yield Bond?

    A high-yield bond is a bond issued by a company with a very low credit rating.
  10. Options & Futures

    Common Bond-Buying Mistakes

    Avoid these errors made daily in bond portfolios everywhere.
RELATED TERMS
  1. Investment Grade

    A rating that indicates that a municipal or corporate bond has ...
  2. Credit Rating

    An assessment of the creditworthiness of a borrower in general ...
  3. Junk Bond

    A colloquial term for a high-yield or non-investment grade bond. ...
  4. Class 3-6 Bonds

    Several classes of noninvestment grade bonds held by an insurance ...
  5. Trade Credit

    An agreement where a customer can purchase goods on account (without ...
  6. Moody's Bond Survey

    A weekly publication that reports changes in corporate bond quality ...
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center