Investment Grade vs High Yield IG vs HY
A credit-quality dividing line: bonds rated in the safer tiers are investment grade; everything rated below that line is high yield.
What it is
Credit rating agencies score a bond issuer's ability to pay interest and principal on time, using letter scales. The scales split at a conventional line: the top tiers are called investment grade, and everything below is called high yield (also known as speculative grade, or colloquially junk). On the Standard & Poor's and Fitch scales the line sits between BBB- and BB+; on the Moody's scale it sits between Baa3 and Ba1. The label describes assessed default risk, not the size of the coupon — the name high yield exists because riskier borrowers must offer more yield to attract lenders.
Why it matters
The split explains why two bonds paying different amounts are not simply better and worse deals. A high-yield bond compensates the lender for a higher assessed chance of missed payments, restructuring or default, in which some or all of the principal can be lost. The line also has plumbing effects: some funds and mandates are written to hold only investment-grade bonds, so a bond downgraded across the line can be sold out of those portfolios whether or not the manager wants to hold it; a bond that falls from investment grade to high yield is nicknamed a fallen angel. Ratings are opinions, they change over time, and they are not guarantees.
How it's calculated
It is not calculated by the investor — it is published. Agencies (Moody's, S&P, Fitch, and Morningstar DBRS) assign a letter rating after reviewing an issuer's financial statements, cash flow, debt load, industry position, and the structure of the specific bond. Agencies also attach outlooks and can upgrade or downgrade at any time. To place a bond, read its rating against the agency's own published cutoff: BBB-/Baa3 and above is investment grade; BB+/Ba1 and below is high yield. Some bonds are unrated, which is not the same as being rated poorly. Different agencies can rate the same bond differently, which is called a split rating.