Bonds Credit Rating/rating of Bonds
Emmadi asked:
risk of default involved with corporate bonds. So how does an investor decide on which companies’ issues he has to invest in? The market participants can’t assess the risk involved as they may not have full information about corporates. They rely on credit rating agencies before taking an investment decision. These credit rating agencies give ratings to corporate issues by applying proprietary methodologies for assessing financial strength of the issuers and risks that may impair their capability to payback interest as well as principal.
There are a number of ratings service organizations that provide a breakdown of relevant factors that can impact the bond rating process. After evaluating each factor that is involved in arriving at the bond rating, the agencies provide a consolidated rating. Ratings provided by Moody’s Investors Service and Standard & Poor (S&P) are very famous in US. The other rating agencies are Fitch, Pacific Credit Rating, Egan-Jones Ratings Company. In India ICRA (Investment information and Credit Rating Agency) and CRISIL (Credit Rating Information Services of India Limited) are leading credit rating agencies. ICRA is an associate of Moody’s Investors Service.
A point to be noted here is the credit rating is specific to the issue and not issuer specific. This is because a medium scale company which got Baa rating for it’s previous issue may not get the same rating if it comes up with a new big issue. More over the credit rating agencies consider re-rating the previous issue.
In addition to the ratings listed above, Moody’s adds a “1″ to indicate a slightly higher credit quality. For example, a rating of “A1″ is slightly higher than a rating of “A” whereas “A3″ is slightly lower. S&P ratings may be modified by the addition of a “+” or “-”. “A+” being slightly higher grade than “A” and “A-” being slightly lower.
Occasionally you may see some bonds with an “NR” in either Moody’s or S&P. This means Not Rated and does not necessarily mean that the bonds are of low quality. It basically means that the issuer did not apply to either Moody’s or S&P for a rating. Government agencies are a good example of very high quality bonds that are not rated by Standard and Poors (S&P).
risk of default involved with corporate bonds. So how does an investor decide on which companies’ issues he has to invest in? The market participants can’t assess the risk involved as they may not have full information about corporates. They rely on credit rating agencies before taking an investment decision. These credit rating agencies give ratings to corporate issues by applying proprietary methodologies for assessing financial strength of the issuers and risks that may impair their capability to payback interest as well as principal.
There are a number of ratings service organizations that provide a breakdown of relevant factors that can impact the bond rating process. After evaluating each factor that is involved in arriving at the bond rating, the agencies provide a consolidated rating. Ratings provided by Moody’s Investors Service and Standard & Poor (S&P) are very famous in US. The other rating agencies are Fitch, Pacific Credit Rating, Egan-Jones Ratings Company. In India ICRA (Investment information and Credit Rating Agency) and CRISIL (Credit Rating Information Services of India Limited) are leading credit rating agencies. ICRA is an associate of Moody’s Investors Service.
A point to be noted here is the credit rating is specific to the issue and not issuer specific. This is because a medium scale company which got Baa rating for it’s previous issue may not get the same rating if it comes up with a new big issue. More over the credit rating agencies consider re-rating the previous issue.
In addition to the ratings listed above, Moody’s adds a “1″ to indicate a slightly higher credit quality. For example, a rating of “A1″ is slightly higher than a rating of “A” whereas “A3″ is slightly lower. S&P ratings may be modified by the addition of a “+” or “-”. “A+” being slightly higher grade than “A” and “A-” being slightly lower.
Occasionally you may see some bonds with an “NR” in either Moody’s or S&P. This means Not Rated and does not necessarily mean that the bonds are of low quality. It basically means that the issuer did not apply to either Moody’s or S&P for a rating. Government agencies are a good example of very high quality bonds that are not rated by Standard and Poors (S&P).
Categories: Investing Tags: Corporates, Credit Rating Information Services, Relevant Factors
Understanding the Credit Rating System
Ben Moeneclaey asked:
The credit rating system enables you to research companies that you are considering investing in. There are three main companies that offer ratings; Standard & Poor, Fitch and Moody’s.
Standard & Poor’s and Fitch assign credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, or D. Moody’s assigns credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, or C.
S&P, Moody and Fitch will also assign intermediate ratings at levels between AA and B (e.g., BBB+, BBB and BBB-), and can sometimes also offer guidance for the future as to whether the company is likely to be upgraded, downgraded or uncertain.
There is a strong link between the risks of “stock market investments” and the profit you can receive from them. In order to make a profit, you should take a few risks but be careful not to risk too much.
This means that AAA companies are very good and unlikely to lose value; however, it also means the profit could be limited. You could receive more or less the same interest as with saving accounts.
If you invested in BBB, you would take some calculated risks, but make some profit. The lower quality shares you buy, the more risks you would take and the more return you would have. However, in order to reduce risk, you may not want to invest in a quality under CCC. Starting from CC you will have a lot of unknown parameters you can’t control because of the poor quality of the shares. The probability of losing your money would then be sky-high.
When you invest it is important you thoroughly research the companies, or funds in which you intend to invest in. In the new age of internet, it is easy to acquire true information. The worst thing to do is listen to rumours.
The credit rating system enables you to research companies that you are considering investing in. There are three main companies that offer ratings; Standard & Poor, Fitch and Moody’s.
Standard & Poor’s and Fitch assign credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, or D. Moody’s assigns credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, or C.
S&P, Moody and Fitch will also assign intermediate ratings at levels between AA and B (e.g., BBB+, BBB and BBB-), and can sometimes also offer guidance for the future as to whether the company is likely to be upgraded, downgraded or uncertain.
There is a strong link between the risks of “stock market investments” and the profit you can receive from them. In order to make a profit, you should take a few risks but be careful not to risk too much.
This means that AAA companies are very good and unlikely to lose value; however, it also means the profit could be limited. You could receive more or less the same interest as with saving accounts.
If you invested in BBB, you would take some calculated risks, but make some profit. The lower quality shares you buy, the more risks you would take and the more return you would have. However, in order to reduce risk, you may not want to invest in a quality under CCC. Starting from CC you will have a lot of unknown parameters you can’t control because of the poor quality of the shares. The probability of losing your money would then be sky-high.
When you invest it is important you thoroughly research the companies, or funds in which you intend to invest in. In the new age of internet, it is easy to acquire true information. The worst thing to do is listen to rumours.
Categories: Investing Tags: Ccc, Control, Stock Market Investments