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When a bond is said to be “investment grade”, what does that mean?

Bond rating agencies such as the Dominion Bond Rating Service (DBRS) in Canada and Standard and Poor’s and Moody’s in New York, conduct independent tests of default risk of provincial and corporate bond issuers. They assign a letter rating to reflect their assessment of the bond’s credit quality.

Bond ratings are a measure of financial strength of the company and its future prospects and give an indication as to whether or not the borrower will fulfill obligations in a timely manner, with respect to both interest and principal. Rating categories differ depending on whether debt is short or long term. For example, DBRS ratings for commercial paper and short-term debt are as follows: DBRS ratings for bonds and long term debt have similar categories and descriptions. All bonds rated BBB or higher are considered investment grade. Many institutions and individual investors invest primary in bonds rated at investment grade.