An investment-grade bond is a bond classification used to denote bonds that carry a relatively low credit risk compared to other bonds
There are three major credit rating agencies (Standard & Poor’s, Moody’s, and Fitch) that provide ratings on bond
Each credit rating agency sets a minimum bond rank to be classified as investment-grade:
Investment-grade bonds, historically, have had low default rates (low credit risk).
Yields for investment-grade bonds are lower than that of non-investment-grade bonds.
S&P Global reported that the highest one-year default rate for AAA, AA, A, and BBB-rated bonds (investment-grade bonds) were 0%, 0.38%, 0.39%, and 1.02%, respectively.
It can be contrasted with the maximum one-year default rate for BB, B, and CCC/C-rated bonds (non-investment-grade bonds) of 4.22%, 13.84%, and 49.28%, respectively.
Therefore, institutional investors generally adhere to a policy of limiting bond investments to only investment-grade bonds due to their historically low default rates.