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. 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 ...
  2. Where can I find year-to-date (YTD) returns for benchmarks?

    Discover which financial data providers publish year-to-date benchmark performance. Find out which websites provide YTD price ...
  3. What types of investments are allowed in a provident fund?

    Read about the types of investments allowed in various provident funds around the world, including the Indian, Malaysian ...
  4. How do I evaluate a debt security?

    Look at a brief overview of the important factors to consider before purchasing a debt security, such as a corporate or government ...
RELATED TERMS
  1. Accelerated Return Note (ARN)

    A short- to medium-term debt instrument that offers a potentially ...
  2. Next Generation Fixed Income (NGFI) Manager

    A Next Generation Fixed Income (NGFI) manager is a fixed income ...
  3. Next Generation Fixed Income (NGFI)

    Next generation fixed income is an innovative approach to investing ...
  4. Prime Credit

    A credit score that falls into the range that is one step down ...
  5. Super-Prime Credit

    Consumers with super-prime credit are considered to have excellent ...
  6. Class 3-6 Bonds

    Several classes of noninvestment grade bonds held by an insurance ...

You May Also Like

Related Articles
  1. Investing Basics

    Which securities are considered investment ...

  2. Professionals

    Worried About Stocks? Try on Convertibles

  3. Stock Analysis

    Playing Rising Rates with Ultra-Short ...

  4. Professionals

    Is a Bond Market Selloff Coming?

  5. Investing News

    Apple’s New Business: Bonds

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!