What does investment grade mean?

By Investopedia Staff AAA
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?

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