You’ve probably come across credit ratings if you invest in securities or other debt instruments. They generally consist of alphabetical letters and can provide an estimation of the relative degree of the credit risk of a bond, government, or corporation in general. It is a creditworthiness assessment of the debt instrument or obligor based on the theoretical models, observations, and assumptions of the credit rating agency.
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What does Investment Grade Mean?
Investment Grade refers to the quality measure assigned by credit rating agencies to bonds with a low probability of default. This term ensures that the graded debt is of strong credit quality. Most of the investors plan their investment based on the credit rating given to a particular organization by the credit rating agencies. There are various individual credit rating agencies that provide the investment grade, but some of the major credit rating agencies are Standard & Poor’s (S&P), Moody’s, Fitch. These Credit Rating Agencies determine the grade of an organization by studying an organization’s financial health like its financial strength, weakness, liquidity, risks, structure, past performances, future growth, and the status of an organization’s debt taking and repaying abilities.
Following are the list of investment grades given by the major credit rating agencies:
The above chart shows the investment-grade given by the major credit rating agencies. The securities under prime rating assure maximum safety whereas high-grade securities are slightly more risker than prime but less risker than an upper-medium grade. These types of securities have a lower risk of default. The securities that fall under BBB- or higher as considered to be of investment grade. The securities that fall under BB+ or lower are considered to be of non-investment grade. These securities are known as high yield or junk bonds, they are extremely risky and have a higher risk of default.
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Securities are considered Investment Grade?
The securities that belong to the government or the fixed-income group and have a lower risk of default are considered to be of investment grade. Such securities are bonds issued by the government or the private group to the public. Another type of bonds like municipal bonds or treasury bonds will be considered under investment grade.
An investment grading system helps investors to evaluate an organization’s performance and mitigate their risk of investing. This helps them to generate high returns. This also helps an organization to improve its performance in the market and gain investor’s confidence. In simple words, it is a financial instrument that helps an organization to study its past performance and the present and gears it to enhance its future performance.
Author: Divyashri Kadam
About The Author: Divyashri is a Bachelor’s Degree Holder in Accounting and Finance. Also, a Certified Financial Modeling and Valuation Analyst (FMVA). She is enthusiastic to learn more about financial markets, financial analysis, and anything relating to stocks.