Credit Rating Agencies
Overview
Measuring credit risk is hard task. This is in part due to the fact that credit instruments and the companies that issue
them are not homogenous, and therefore a straightforward statistical assessment becomes difficult.
Because of the difficulty of creating credit risk models for publicly traded loans, some companies have created their own
credit models of publicly traded instruments and will sell the results. These companies are the rating agencies. There
are two prominent rating agencies.
Rating agency ratings also make it possible for fund managers to provide risk limits on the assets they will invest in based
on the rating agenices ratings.
Moodys
Moodys assigns one of the following ranked ratings
to the bonds it assesses.
Aaa,Aa1,Aa2,Aa3,A1,A2,A3, Baa1,Baa2,Baa3,
Ba1,Ba2,Ba3,B1, B2,B3,Caa1,Caa2,Caa3,Ca,C
Ratings above Ba1 are deemed to be investment grade, and
Ba1 rated bonds and lower are speculative (sometimes called junk).
S&P
Moodys assigns one of the following ranked ratings
to the bonds it assesses.
AAA,AA+,AA,AA-,A+,A,BBB,BB,B,CCC,CC,C,R,SD,D,NR
Ratings above BB are deemed to be investment grade, and
BB rated bonds and lower are speculative (sometimes called junk).
