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. When should a company consider issuing a corporate bond vs. issuing stock?

    Understand when a company should consider issuing a corporate bond versus issuing stock, and learn about the underlying principle ...
  3. How is a corporate bond taxed?

    Understand the three components of a corporate bond that are subject to taxes. Learn about the ways the federal and state ...
  4. Why is Manchester United (MANU) carrying so much debt?

    Learn how the Glazer family incurred substantial debt for its takeover of Manchester United, and understand how that debt ...
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. Mutual Funds & ETFs

    How To Short The U.S. Bond Market

  3. Mutual Funds & ETFs

    The EMAG Emerging Mkts Bond ETF: Worth ...

  4. Mutual Funds & ETFs

    5 Dividend ETFs with Growth Potential

  5. Investing

    Feeling Risk-Averse? Consider These ...

Trading Center