Credit Rating

Reliability of a bond issuer. Credit ratings are usually inversely related to return on investment. Credit risk models rely on both characteristics of bond and the issuer/borrower Third party credit rating agencies providing this service are Moody’s, Standard and Poor’s (S&P), and Fitch.  CRAs perform analysis of bond issues and publish credit worthiness A credit rating can be assigned to any entity that seeks to borrow money – an individual, corporation, state or provincial authority, or sovereign government. A loan is essentially a promise, and a credit rating determines the likelihood that the borrower will pay back a loan within the confines of the loan agreement, without defaulting. A high credit rating indicates a high possibility of paying back the loan in its entirety without any issues; a poor credit rating suggests that the borrower has had trouble paying back loans in the past, and might follow the same pattern in the future CRAs attracted substantial criticism during the financial crisis as to the accuracy of their ratings. As a result, CRAs have come under far greater regulatory scrutiny since the crisis

Rating Scales

Each agency uses its own scale Gradings are indicated by rating symbols where each symbol is a category Every agency could have individual modifiers in form of signs or numbers : S&P and Fitch (BBB+), Moody’s (Baa1) Standard & Poor’s, for instance, has a credit rating scale ranging from AAA (excellent) and AA+ all the way to C and D. A debt instrument with a rating below BBB- is considered to be speculative grade or a junk bond, which means it is more likely to default on loans. A credit rating of BBB−/Baa3 or higher is categorized as investment grade

Categories: Bonds

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