The Investor's Guidebook to Fixed Income Investments by Stuart R. Veale

Author:Stuart R. Veale
Language: eng
Format: epub
Published: 2019-01-18T16:00:00+00:00

C REDIT R ATING

Credit risk is the risk that the loan either won’t be repaid in full or will be repaid late. Naturally, different loans have different levels of credit risk. Some loans have virtually no risk, such as a short-term loans to the US government. Other loans have a high degree of risk, such as loans to start-up mining operations or biotech companies that haven’t yet perfected their products. High-risk loans naturally pay higher interest rates.

Because most investors lack the expertise to assess the level of credit risk in a particular loan, there are companies, such as Moody’s and Standard & Poor’s, that offer professional credit analysis services. They assign loans ratings based on the probability that the loans will be repaid in full and on time. The ratings range from Aaa/AAA for a bond that has virtually no credit risk down to C or D for bonds that are already in default or where default is a high probability. The table shown in Figure 1.6 explains the major ratings.

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