Fictionary: Investment Grade Bonds
Investment grade bonds are those that have a high-quality rating. When we reference the investment grade market, typically what we mean are companies that have this high credit quality rating. Importantly, in the investment grade corporate bond space, the various dynamics will vary significantly on a company-by-company basis, but also on a regional basis.
BY KASHISH SINGLA | 2 Mins Read
BY KASHISH SINGLA | 2 Mins Read
Understanding Investment-grade Bonds
An understanding of credit ratings is extremely important as they convey information regarding the credit risk of a bond. In other words, the credit rating imposed on a bond denotes the likelihood of the bond defaulting. Of the credit ratings, bonds can be investment-grade or non-investment grade. For example, the bond ratings for Standard & Poor’s (S&P) are provided below:
As such, the credit risk of investment-grade bonds ranges from the lowest level of credit risk to moderate credit risk – investment-grade bonds are generally likely to meet payment obligations. Bonds that are not investment-grade are called junk bonds, high-yield bonds, or non-investment-grade bonds.
Example of Investment-Grade Bonds
An investor is looking to invest in a floating rate fund. His criterion is that the bonds in the fund must majority (>50%) consist of investment-grade bonds. The fund follows the credit rating system of S&P and shows the following credit allocation of the fund:
Does the floating rate fund satisfy the criteria of being comprised of majority investment-grade bonds?
In the credit rating system by S&P, bonds that are rated BBB- or higher are considered investment-grade. Therefore, the floating rate fund above shows 62% of its fund invested in investment-grade bonds. Therefore, the floating rate fund satisfies the investor’s criterion.