What It Is:
How It Works/Example:
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 It Matters:
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.