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Trading and Investment Terms

Investment Grade Bond

An investment-grade bond is a bond classification used to denote bonds that carry a relatively low credit risk compared to other bonds

 

There are three major credit rating agencies (Standard & Poor’s, Moody’s, and Fitch) that provide ratings on bond

 

Each credit rating agency sets a minimum bond rank to be classified as investment-grade:

  • Standard & Poor’s denotes bonds rated BBB- or higher as investment grade.
  • Moody’s denotes bonds rated Baa3 or higher as investment grade.
  • Fitch denotes bonds rated BBB- or higher as investment grade.

Investment-grade bonds, historically, have had low default rates (low credit risk).

Yields for investment-grade bonds are lower than that of non-investment-grade bonds.

 

For example:

S&P Global reported that the highest one-year default rate for AAA, AA, A, and BBB-rated bonds (investment-grade bonds) were 0%, 0.38%, 0.39%, and 1.02%, respectively. 

It can be contrasted with the maximum one-year default rate for BB, B, and CCC/C-rated bonds (non-investment-grade bonds) of 4.22%, 13.84%, and 49.28%, respectively. 

Therefore, institutional investors generally adhere to a policy of limiting bond investments to only investment-grade bonds due to their historically low default rates.