What is an Investment Grade Rating?
In the bond market, an investment grade rating means that the bond has an investment grade credit rating. This is different from a non-investment grade rating, which means that there is a higher risk of default. The investment grade rating also means that a bond is guaranteed to pay interest or principal when due. However, because of the low risk involved, the investment grade rating does not guarantee high returns. This is why investment grade bonds may still have lower yields than junk bonds or high yield bonds.
Investment grade ratings are based on companies’ financial strength, profitability, and past credit history. They can change based on a number of factors, but they are a good guide for investors to understand the risk associated with each investment option. For example, if a company has an investment grade rating of BBB, it is likely to pay a stable dividend even in the face of a stock market crash.
An investment grade rating is used to determine the creditworthiness of fixed-income bonds, bills, and notes. A high investment grade rating indicates a low risk of default. It also enables investors to compare various investment options, thereby making them more informed decisions. The credit rating agency determines the creditworthiness of a company based on the investment grade rating.
Investment grade ratings are important for the financial world, as many regulated financial institutions can only buy securities that have received an investment grade rating. These ratings are calculated by a third-party company called the NRSRO. This organization assigns ratings to securities that meet a certain standard, such as a high-quality government bond or an investment-grade corporate bond.
Investment grade bonds are rated by three credit rating agencies: Moody’s, Fitch, and Standard & Poor’s. These three agencies all have a hierarchy of ratings, and the BBB or higher is considered investment grade. Investment grade bonds are relatively low-risk, and the yields are lower than those of non-investment-grade bonds.
Moody’s Investors Service has lowered the investment grade rating of Ohio-based ProMedica Health System. The company’s credit has been hit hard by COVID-19 related challenges. The company’s investment grade rating is now Baa2, meaning that the company is at risk of further deterioration. ProMedica has more than $2.3 billion in operating lease obligations and debt that will need to be repaid.