A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. The credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency’s analysts.
Sovereign credit ratings
A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The sovereign credit rating indicates the risk level of the investing Environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk.
The “country risk rankings” table shows the ten least-risky countries for Investment as of January 2018. Ratings are further broken down into components including political risk, economic risk. Euromoney’s bi-annual country risk index monitors the political and economic stability of 185 sovereign countries. Results focus foremost on economics, specifically sovereign default risk or payment default risk for exporters.
Credit ratings can address a corporation’s financial instruments i.e. debt security such as a bond, but also the corporations itself. Ratings are assigned by credit rating agencies, the largest of which are Standard & Poor’s, Moody’s and Fitch Ratings. They use letter designations such as A, B, C. Higher grades are intended to represent a lower Probability of default.
Agencies do not attach a hard number of probability of default to each grade, preferring descriptive definitions such as: “the obligor’s capacity to meet its financial commitment on the obligation is extremely strong,” or “less vulnerable to non-payment than other speculative issues .” (Standard and Poors’ definition of an AAA-rated and a BB-rated bond respectively). However, some studies have estimated the Average risk and reward of Bonds by rating. One study by Moody’s claimed that over a “5-year time horizon” bonds it gave its highest rating (Aaa) to had a “cumulative default rate” of 0.18%, the next highest (Aa2) 0.28%, the next (Baa2) 2.11%, 8.82% for the next (Ba2), and 31.24% for the lowest it studied (B2). Over a longer period, it stated “the order is by and large, but not exactly, preserved”.
Another study in Journal of Finance calculated the additional interest rate or “spread” corporate bonds pay over that of “riskless” US Treasury bonds, according to the bonds’ rating. Looking at rated bonds for 1973–89, the authors found a AAA-rated bond paid 43 “basis points” (or 43/100 of a Percentage point) over a US Treasury bond (so that it would yield 3.43% if the Treasury yielded 3.00%). A CCC-rated “junk” (or speculative) bond, on the other hand, paid over 7% (724 basis points) more than a Treasury bond on average over that period.
Different rating agencies may use variations of an alphabetical combination of lowercase and uppercase letters, with either plus or minus signs or numbers added to further fine-tune the rating . The Standard & Poor’s rating scale uses uppercase letters and pluses and minuses. The Moody’s rating system uses numbers and lowercase letters as well as uppercase.
Standard & Poor’s
Standard & Poor’s Financial Services LLC (S&P) is an American financial services company. It is a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is known for its stock market indices such as the U.S.-based S&P 500, the Canadian S&P/TSX, and the Australian S&P/ASX 200. S&P is considered one of the Big Three credit-rating agencies, which also include Moody’s Investors Service and Fitch Ratings. Its head office is located on 55 Water Street in Lower Manhattan, New York City.
As a credit-rating agency (CRA), the company issues credit ratings for the debt of public and private companies, and other public borrowers such as governments and governmental entities. It is one of several CRAs that have been designated a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission. S&P issues both short-term and long-term credit ratings.
Fitch Ratings
Fitch Ratings Inc. is one of the “Big Three credit rating agencies”, the other two being Moody’s and Standard & Poor’s. It is one of the three nationally recognized statistical rating organizations (NRSRO) designated by the U.S. Securities and Exchange Commission in 1975. Fitch Ratings is headquartered in New York, US. Hearst owns 100 percent of the company following its acquisition of an additional 20 percent for $2.8 billion on April 12, 2018. Hearst had owned 80 percent of the company after increasing its ownership stake by 30 percent on December 12, 2014, in a transaction valued at $1.965 billion. Hearst’s previous Equity interest was 50 percent following expansions on an original acquisition in 2006.
Moody’s Analytics
Moody’s Analytics is a subsidiary of Moody’s Corporation established in 2007 to focus on non-rating activities, separate from Moody’s Investors Service. It provides economic research regarding risk, performance and financial modeling, as well as consulting, training and Software services. Moody’s Analytics is composed of divisions such as Moody’s KMV, Moody’s economy.com, Moody’s Wall Street Analytics, the Institute of Risk Standards and Qualifications, and Canadian Securities Institute Global Education Inc.
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Credit Rating Agencies
Credit rating agencies are companies that assess the creditworthiness of borrowers. They assign ratings to borrowers, which indicate the likelihood that the borrower will repay its debt. Credit ratings are used by investors to make decisions about whether to lend Money to borrowers.
The three largest credit rating agencies are Standard & Poor’s, Moody’s, and Fitch. These agencies are known as the “Big Three” credit rating agencies. The Big Three have a near-monopoly on the credit rating market.
Credit rating agencies use a variety of factors to assess the creditworthiness of borrowers. These factors include the borrower’s financial history, its current financial condition, and its future prospects. Credit rating agencies also consider the borrower’s Industry and the economic environment.
Credit ratings are important because they provide investors with information about the risk of lending money to borrowers. Credit ratings can also affect the cost of borrowing money. Borrowers with higher credit ratings typically pay lower interest rates on loans.
Credit Rating Methodologies
Credit rating agencies use a variety of methodologies to assess the creditworthiness of borrowers. These methodologies are based on the agency’s own proprietary models. The models take into account a variety of factors, such as the borrower’s financial history, its current financial condition, and its future prospects.
The Big Three credit rating agencies use similar methodologies. However, there are some differences in the way that the agencies weight the various factors. These differences can lead to different ratings for the same borrower.
Credit rating methodologies are constantly evolving. The agencies are constantly updating their models to reflect changes in the economy and the Financial Markets.
Credit Rating Outlooks and Watch Lists
Credit rating agencies also issue outlooks and watch lists. Outlooks indicate the agency’s view of the borrower’s creditworthiness over the near term. Watch lists indicate that the agency is closely monitoring the borrower and may take action to change its rating in the near future.
Credit rating outlooks and watch lists can have a significant impact on the market for a borrower’s debt. A negative outlook or watch list can lead to higher borrowing costs for the borrower.
Credit Rating Controversies
Credit rating agencies have been criticized for their role in the financial crisis of 2008. The agencies gave high ratings to subprime mortgages, which were later shown to be very risky. This led to many investors buying subprime mortgages, which ultimately lost a lot of value.
The credit rating agencies have also been criticized for their lack of transparency. The agencies do not disclose the details of their rating models, which makes it difficult for investors to understand how the ratings are determined.
The Role of Credit Ratings in Financial Markets
Credit ratings play a vital role in financial markets. They provide investors with information about the risk of lending money to borrowers. Credit ratings also affect the cost of borrowing money. Borrowers with higher credit ratings typically pay lower interest rates on loans.
Credit ratings are also used by regulators to set capital requirements for banks. Banks are required to hold more capital against loans to borrowers with lower credit ratings. This helps to protect banks from losses in the event that borrowers default on their loans.
The Impact of Credit Ratings on the Economy
Credit ratings have a significant impact on the economy. They affect the cost of borrowing money, which can impact investment and economic Growth. Credit ratings also affect the value of assets, such as stocks and bonds. This can impact the wealth of individuals and businesses.
Credit ratings can also have a psychological impact on the economy. When credit ratings are high, it can create a sense of confidence in the economy. This can lead to increased investment and economic growth. However, when credit ratings are low, it can create a sense of uncertainty in the economy. This can lead to decreased investment and economic growth.
The Future of Credit Ratings
The credit rating industry is facing a number of challenges. The financial crisis of 2008 led to a loss of confidence in the credit rating agencies. The agencies have also been criticized for their lack of transparency.
The credit rating agencies are working to address these challenges. They are developing new methodologies and improving their transparency. However, it is unclear whether these efforts will be enough to restore confidence in the credit rating industry.
What is a credit rating?
A credit rating is a measure of a borrower’s creditworthiness. It is used by lenders to assess the risk of lending money to a borrower. Credit ratings are assigned by credit rating agencies, such as Standard & Poor’s, Moody’s, and Fitch.
What are the different types of credit ratings?
There are three main types of credit ratings: investment grade, speculative grade, and default. Investment grade ratings are assigned to borrowers with a low risk of default. Speculative grade ratings are assigned to borrowers with a higher risk of default. Default ratings are assigned to borrowers who have already defaulted on their debt.
What are the benefits of having a good credit rating?
There are many benefits to having a good credit rating. A good credit rating can help you qualify for lower interest rates on loans, which can save you money in the long run. It can also help you get approved for loans more easily. Additionally, a good credit rating can make you look more attractive to potential employers.
How can I improve my credit rating?
There are a few things you can do to improve your credit rating. First, make sure you pay your bills on time every month. This is the most important factor in determining your credit score. Second, keep your credit utilization low. This means using less than 30% of your available credit. Third, check your credit report for errors and dispute any that you find. Finally, consider getting a secured credit card if you have bad credit. A secured credit card is a type of credit card that requires you to put down a deposit, which is then used as your credit limit. Using a secured credit card responsibly can help you build your credit history and improve your credit score.
What is a credit score?
A credit score is a number that represents your creditworthiness. It is calculated based on your credit report, which includes information about your credit history, such as your payment history, credit utilization, and the length of your credit history. Credit scores range from 300 to 850, with 850 being the highest.
What is a credit report?
A credit report is a document that contains information about your credit history. It includes information about your debts, your payment history, your credit utilization, and the length of your credit history. Credit reports are used by lenders to assess your creditworthiness.
How can I get a copy of my credit report?
You can get a free copy of your credit report from each of the three major credit bureaus once per year at AnnualCreditReport.com. You can also get a copy of your credit report if you are applying for a loan or a job.
What is a credit bureau?
A credit bureau is a company that collects information about borrowers and creates credit reports. The three major credit bureaus in the United States are Equifax, Experian, and TransUnion.
What is a debt collector?
A debt collector is a company that is hired by a creditor to collect a debt. Debt collectors can contact you by phone, mail, or email. They may also try to visit you at your home or place of work.
What are my rights when dealing with a debt collector?
You have certain rights when dealing with a debt collector. You have the right to be told who the debt collector is and who the original creditor is. You also have the right to dispute the debt. If you dispute the debt, the debt collector must stop collection activities until they have verified the debt. You also have the right to be treated fairly by the debt collector. This means that the debt collector cannot harass you or threaten you.
What should I do if I am being harassed by a debt collector?
If you are being harassed by a debt collector, you should contact the Federal Trade Commission (FTC). The FTC is a government agency that protects consumers from unfair, deceptive, and abusive practices. You can file a complaint with the FTC online at ftc.gov/complaint or by calling 1-877-FTC-HELP.
What should I do if I cannot afford to pay my debts?
If you cannot afford to pay your debts, you should contact a credit counseling agency. A credit counseling agency can help you develop a budget and negotiate with your creditors to lower your monthly payments. You can find a credit counseling agency online at nfcc.org or by calling 1-800-388-2227.
Question 1
Which of the following is not a type of credit rating?
(A) Investment grade
(B) High yield
(C) Sovereign
(D) International
Answer
(D) International
Explanation
International is not a type of credit rating. The four main types of credit ratings are investment grade, high yield, sovereign, and structured finance.
Question 2
Which of the following is the highest credit rating?
(A) AAA
(B) AA
(C) A
(D) BBB
Answer
(A) AAA
Explanation
AAA is the highest credit rating. It is assigned to borrowers with the lowest credit risk.
Question 3
Which of the following is the lowest credit rating?
(A) D
(B) C
(C) B
(D) BB
Answer
(D) D
Explanation
D is the lowest credit rating. It is assigned to borrowers with the highest credit risk.
Question 4
What is the purpose of credit ratings?
(A) To assess the creditworthiness of borrowers
(B) To provide information to investors
(C) To help lenders make informed lending decisions
(D) All of the above
Answer
(D) All of the above
Explanation
Credit ratings are used to assess the creditworthiness of borrowers, provide information to investors, and help lenders make informed lending decisions.
Question 5
Who issues credit ratings?
(A) Credit rating agencies
(B) Banks
(C) Governments
(D) All of the above
Answer
(A) Credit rating agencies
Explanation
Credit ratings are issued by credit rating agencies, which are independent companies that assess the creditworthiness of borrowers.
Question 6
What are the three main credit rating agencies?
(A) Standard & Poor’s, Moody’s, and Fitch
(B) Moody’s, S&P Global, and Fitch
(C) S&P Global, Fitch, and DBRS
(D) DBRS, S&P Global, and Moody’s
Answer
(A) Standard & Poor’s, Moody’s, and Fitch
Explanation
The three main credit rating agencies are Standard & Poor’s, Moody’s, and Fitch. These agencies are responsible for issuing credit ratings to borrowers around the world.
Question 7
How are credit ratings calculated?
(A) Based on a variety of factors, including the borrower’s financial history, current financial situation, and future prospects
(B) Based on the borrower’s credit score
(C) Based on the borrower’s debt-to-income ratio
(D) All of the above
Answer
(A) Based on a variety of factors, including the borrower’s financial history, current financial situation, and future prospects
Explanation
Credit ratings are calculated based on a variety of factors, including the borrower’s financial history, current financial situation, and future prospects. These factors are used to assess the borrower’s creditworthiness.
Question 8
What are the benefits of having a good credit rating?
(A) You will be able to borrow money at lower interest rates
(B) You will be able to qualify for more loans
(C) You will be able to get better insurance rates
(D) All of the above
Answer
(D) All of the above
Explanation
There are many benefits to having a good credit rating. A good credit rating will allow you to borrow money at lower interest rates, qualify for more loans, and get better insurance rates.
Question 9
What are the consequences of having a bad credit rating?
(A) You will be charged higher interest rates on loans
(B) You will be denied loans
(C) You will have to pay higher insurance rates
(D) All of the above
Answer
(D) All of the above
Explanation
There are many consequences of having a bad credit rating. A bad credit rating will result in you being charged higher interest rates on loans, being denied loans, and having to pay higher insurance rates.
Question 10
How can you improve your credit rating?
(A) Pay your bills on time
(B) Keep your credit utilization low