Investment grade
Credit rated highly enough that default is remote, so what is being priced is the risk of the rating moving rather than of not being paid.
Where you will meet it
Investment grade appears in 6 learning outcomes on the CFA syllabus. A few of them:
- Break a yield spread down into the parts that make it up
“Empirically, expected default losses account for only a fraction of observed investment grade spreads, which is why a strategy priced on default probabilities alone appears to find free money and does not.”
- Explain issuer-level (bottom-up) ways of running a credit strategy
“A useful yardstick is spread per unit of risk: for investment grade, spread duration and duration times spread let bonds be compared, and a bond whose spread is wide for its rating and fundamentals is a candidate.”
- Use the four Cs framework to analyse credit
“Capacity dominates the analysis for investment grade issuers.”
- Contrast credit analysis of high yield issuers with that of investment grade ones
“Investment grade analysis is largely about the direction of leverage and coverage over the cycle, because default is remote and the risk being priced is a ratings migration.”
Practise it
Practise investment grade until it is automatic: questions that explain every wrong option.
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