The Role of Credit Ratings

The Role of Credit Ratings

Investors in a company’s debt rely on the company’s credit rating to determine whether the risk is worth taking. In this video, Moorad explains what a credit rating is, how a formal credit rating is calculated and how it is used to determine the level of risk of holding a particular debt issue.
Overview

Investors in a company’s debt rely on the company’s credit rating to determine if the risk that such debt represents is one that they would wish to take, in return for the expected reward that holding the debt issue should bring. Hence, having a high credit rating is of great importance to issuers of debt.

Key learning objectives:

  • What is a credit rating?

  • What are credit ratings applied to?

  • What two methods do investors employ in measuring credit risk?

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