What is an Investment Grade?

Investment grade is a quality designation ascribed by rating agencies to bonds that have little risk of default.

How Does an Investment Grade Work?

Municipal and corporate bonds are rated by credit agencies, such as Standard & Poor's and Moody's, based on the creditworthiness of the issuer. Investment grade indicates that a bond is a safe, low-risk debt instrument on which the issuer is unlikely to default.

Ratings of BBB- or higher by Standard & Poor's or ratings of Baa3 or higher by Moody's designate a bond as investment grade. Ratings are subject to change depending of the financial health of the issuer.

Why Does an Investment Grade Matter?

Credit ratings allow investors to better gauge the risks level associated with a specific bond. Investors seeking lower-risk debt tend to choose investment-grade bonds.

Bond investors should be aware that a decline in a bond's rating could adversely affect its market value.