Investment Grade
Candlefocus EditorInvestment grade ratings are important metrics used to determine the risk associated with a company’s debt. The investment grade rating assigned to a company provides investors and debt holders with an indication of the risk of a specific bond. This rating is determined by the credit rating agencies Moody’s, Standard & Poor’s, and Fitch Ratings.
The highest possible rating assigned by these rating agencies is ‘AAA’, meaning that these companies are deemed to be the least likely to default. A ‘AAA’ rating indicates that a company’s bonds are considered to be safe investments with low default risk. The next rating down from ‘AAA’ is ‘AA’ which is also considered to be a low-risk investment, however it represents a slightly higher risk than ‘AAA’ rated bonds. Investment grade ratings continue until ‘BBB’ which generally implies that any bonds with a lower rating are less credit worthy and should be viewed with caution.
It is important to note that investment grade ratings are not static but can change over time. For example, if a company’s financial situation worsens and credit quality deteriorates then the rating may be downgraded and therefore should be reviewed periodically to ensure that there has been no change.
Investment grade ratings are valuable tools to help investors accurately assess risk when investing in corporate and municipal bonds. By considering a company’s credit rating, it is possible to gain a better understanding of the risk that you are taking when investing and the potential returns that can be achieved.