Investment grade

The band of credit ratings above the threshold that separates the higher-quality tier of bonds from the speculative tier. Many institutional mandates permit holdings only within it.

Example

A downgrade across the investment grade line forces sales by funds whose rules do not allow them to hold below it, regardless of what those funds think of the bond.

Important

The line has real mechanical effects on price because of those mandates, which is a fact about the rules rather than about the borrower. Buying something because it is investment grade is not an appraisal.

Related terms

• Credit rating — An agency's published opinion on the relative likelihood that a specific obligation is repaid, expressed on an ordinal scale and usually paid for by the issuer.
• High-yield bond — A bond rated below the investment grade threshold, carrying a wider spread over government yields to compensate for a higher assessed chance of default.
• Credit spread — The difference between a bond's yield and that of a government bond of the same currency and maturity. It is the market's price for the default risk, the illiquidity and any adverse options the government bond does not carry.

Lessons that explain it

• Appraising one bond: three yields that disagree, and what the rating leaves out — A single bond has a coupon rate, a current yield and a yield to maturity, and they are three different numbers. The gap between the last of them and a government bond is the market's own estimate of what could go wrong. (13 min)

All 578 terms in the Investing glossary