Credit rating agencies, rating scales, and the key factors used to assess bond credit risk.
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- Name the three major credit rating agencies in the United States.
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Standard and Poor's (S&P), Moody's, and Fitch.- What does S&P stand for?
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Standard and Poor's.- Which rating agency uses Aaa instead of AAA for its highest rating?
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Moody's.- What is the highest credit rating on the S&P scale?
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AAA (triple A).- What does AAA rating mean?
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Lowest risk of default; extremely strong capacity to meet financial commitments.- At what rating does a bond transition from investment-grade to speculative-grade (junk)?
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Below BBB (on S&P); below Baa (on Moody's).- What is the lowest rating on the S&P bond scale?
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D, which means the bond is in default.- What does the plus or minus modifier mean on an S&P rating?
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It indicates relative position within the rating category, with plus being stronger and minus being weaker.- Which ratings does Moody's classify as investment-grade?
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Aaa, Aa, A, and Baa.- What do speculative-grade ratings also go by?
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Junk ratings or high-yield ratings.- Name three key factors credit agencies consider when rating a corporate bond.
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Industry conditions, issuer's competitive position, and financial metrics such as debt, liquidity, and profitability.- What does interest coverage ratio measure?
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The ability to service debt, calculated as EBIT (earnings before interest and taxes) divided by interest expense.- What is leverage in credit analysis?
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The amount of debt a company uses to finance its assets, typically measured as debt-to-equity or debt-to-assets ratio.- Which is generally more favorable for credit quality: high or low leverage?
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Low leverage, because less debt means lower financial risk and more capacity to weather downturns.- What does liquidity measure in credit analysis?
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A borrower's ability to meet short-term obligations and how easily assets can be converted to cash.
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