Investment grade

Investment grade

A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's or BBB(low) or higher by DBRS. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them.

Ratings play a critical role in determining how much companies and other entities that issue debt, including sovereign governments, have to pay to access credit markets, i.e., the amount of interest they pay on their issued debt. The threshold between investment-grade and speculative-grade ratings has important market implications for issuers' borrowing costs.

In this sense, the opposite of an investment-grade bond is speculative grade bond, also derisively known as a junk bond.

On the other hand, the risks associated with investment-grade bonds (or investment-grade corporate debt) are considered noticeably higher than in the case of first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. It is an indicator for the market's belief in the stability of the economy. The higher these investment-grade spreads (or risk premiums) are, the weaker the economy is considered.

External links

* [http://www.ofdict.com/definition/investment-grade.php Investment grade bonds explained in basic terms]
* [http://www.economist.com/daily/columns/marketview/displaystory.cfm?story_id=10906473] "Time to go shopping?" - "The Economist", March 23rd 2008


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