A credit rating is an opinion of a credit rating agency in relation to the creditworthiness of an obligor or any particular debt instrument. Such opinion is usually formed following a thorough evaluation of the financial, operational, managerial, economical status of the obligor. Long term ratings converse investors with the level of risk involved in a particular investment. So, what exactly are credit ratings? These are opinions of credit ratings with regard to the credit risk of the borrower. These are not facts and cannot be accurate. Rating acts as guidance for investing and does not guarantee default or repayment. It is a future oriented report based on past repayment record and present financial status of the borrowing entity. Credit rating agencies also consider economic, sector trends while arriving at the rating. Credit rating agencies analyze the credibility of corporate organizations, banks, insurance agencies, public finance entities, municipalities and countries as well. Usually agencies obtain information from publicly available financial and other information as well as information gathered by meeting the management team. Macro economic factors are also factored in while arriving at the rating of the borrower. Other quantitative information viz., management abilities, competitive strength, industry cycle are also vital in analysis. Credit rating agencies usually undertake regular monitoring of the ratings issued. Review of financial and economic data is carried out at regular intervals assuring the relevance of the ratings. Long term investment options like bonds, shares etc are issued by corporations, governments, banks etc and they usually have a maturity of more than a year. Owing to their longer tenure, such investments carry a higher risk than short term instruments. Hence, it is imperative for an ordinary investor to refer to expert opinion available in the form long term ratings by various credit rating agencies. Moody's Investors Service, Standard & Poor's, Fitch Ratings etc present long term ratings on various stocks, debt instruments issued by corporations, banks etc. Investors, to have a better understanding of the various risks associated with the particular instrument, it is crucial to have an absolute knowledge of the range of scales issued by these rating agencies to various instruments. As long term ratings are not free of errors, obsolescence and bias, investors are advised to use their caution and prudence in ascertaining the risks and returns of investing in a particular instrument/ entity.
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