Investment Grade

AAA

DEFINITION of 'Investment Grade'

A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

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BREAKING DOWN 'Investment Grade'

Investors should note that government bonds, or Treasuries, are not subject to credit quality ratings. These securities are considered to be of the very highest credit quality. In the case of municipal and corporate bond funds, fund company literature, such as the fund prospectus and independent investment research reports will report an "average credit quality" for the fund's portfolio as a whole.

Investors should be aware that an agency downgrade of a company's bonds from 'BBB' to 'BB' reclassifies its debt from investment grade to "junk" status with just a one-step drop in quality. The repercussions of such an event can be highly problematic for the issuer and can also adversely affect bond prices for investors. Safety-conscious fund investors should pay attention to a bond fund's portfolio credit quality breakdown.

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RELATED FAQS
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    Information about new and existing corporate bond issues is published regularly in financial newspapers, such as The Wall ... Read Full Answer >>
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    Issuers of high-yield bonds can be firms from virtually any market sector. The noninvestment grade rating of their bond issues ... Read Full Answer >>
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    Three of the most popular high-yield bond exchange-traded funds, or ETFs, are the Peritus High Yield ETF (HYLD), the SPDR ... Read Full Answer >>
  4. What are the highest-yielding investment grade bonds?

    The investment grade bonds with the highest yield are all corporate bonds rated either BBB or Baa, depending on the credit ... Read Full Answer >>
  5. How can I tell if a security is considered investment grade?

    It is possible to tell if a security is considered to be investment grade by looking at that security's ratings with either ... Read Full Answer >>
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    There is no way to eliminate all risk from investing. If there were, investors would not be compensated for their capital. ... Read Full Answer >>
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