Investment grade is a term used to describe a favorable rating for corporate and municipal bonds.  Bond rating companies such as Fitch, Moody’s and Standard & Poor’s rate bonds for their credit risk.  They all use similar systems that assign letters to the bond to signify the credit rating.  For instance, Standard & Poor’s letters vary from AAA for high quality bonds, to CCC for very low quality, “junk” bonds.  A grade designation of BBB is a medium quality bond.  Investment grade bonds have a grade of BBB or above, which means they have a very low risk of default. Bond ratings have an important impact on the interest that bond issuers must pay.  If the bond is investment grade, the issuer can issue the bond at a lower yield and thus incur lower interest costs.  When a bond is rated below investment grade, the issuer will have to pay a higher interest rate in order to entice investors to purchase it.  In addition, the price of a bond already in the market will fall if it is subsequently downgraded below investment grade. An investment grade bond has such low risk, even banks are allowed to purchase these bonds for use in their reserves.