Investment Grade Security is a security that has been assigned a rating in the highest rating tier by a recognized ratings agency.
There are two major companies that rate bonds for the risk of default: Moodys and Standard and Poors. Investment grade ratings are given to those issuers who have a low or very low risk of default. Moodys investment grade bonds are rated Aaa-Baa and S&Ps are rated AAA-BBB. Any rating below that is considered speculative, and carries a higher risk of default.
As a rule, risk equals reward, so investment grade bonds pay a lower rate of interest to the bondholders than do speculative grade bonds.
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