What do you need to know about credit rating scale?

Credit rating scale helps in evaluating the credit worthiness of a debtor. There are different types of credit rating scale and you can gain knowledge about them.

  • What do letter ratings indicate?
  • Can credit ratings be used for investment purposes?
  • Do credit ratings change?

What do you need to know about credit rating scale?

  1. Aaa – The obligations are of the highest quality with the lowest level of credit risk
  2. Aa - The obligations are of high quality with the low level of credit risk
  3. A - The obligations are medium quality with the low level of credit risk
  4. Baa - The obligations are medium quality with moderate credit risk
  5. Ba - The obligations are speculative with substantial credit risk
  6. B - The obligations are speculative with high credit risk
  7. Caa - The obligations are of poor standing with substantial credit risk
  8. Ca - The obligations are highly speculative and may default on payments
  9. C - The obligations are lowest rated
  10. P1 – There is a superior ability to pay the short term debt by the issuers
  11. P2 - The issuers have a strong ability to pay the short term debt
  12. P3 - The issuers have an acceptable ability to pay the short term debt
  13. NP - The issuers do not fall in any of the categories

Depending on the agency that assigns these credit ratings these could differ slightly with the inherent meaning remaining the same. The rating scale may also differ from one country to the other.

What are the various types of credit rating scale?

  • Long term and short-term ratings – The credit rating scale is assigned to long term and short term financial obligations. When the maturity of the financial instrument is less than 12 months it is known as short term and those with maturity period of more than 12 months is known as long term.
  • Bank deposit ratings – This credit rating scale is the ability of the bank to repay its foreign and domestic currency obligations.
  • Corporate family ratings – These are long-term ratings and are opinions on the ability of the corporate family to repay the promised payments.
  • Counterparty ratings – The credit rating scale is awarded to financial operating companies.
  • Credit default swaps ratings – These ratings measure the risk associated with a credit protection provider.

Why credit rating scale is considered an indicator of investment?

Credit rating scale is often used by investors to make decisions regarding the type of investments that they plan to make. Although credit rating scale does not make any buy, sell or hold recommendations they speak about the credit quality of the investment that is been made and this is considered important.

When the business and economic environment changes for good or for worse the rating scale also undergoes changes that reflect the current scenario. Inflation, interest rate and cost of capital are some of the factors that could affect them. Therefore, the rating of the financial instrument can go up and down depending on various factors.

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