What is a Rating?
In corporate finance, rating usually refers to a "grade" assigned to a bond, , insurance company or other entity or security to indicate its riskiness. Securities analysts often ratings on ; these ratings are usually "Buy," "Sell" or "Hold."
How Does a Rating Work?
Moody's and Standard & Poor's (S&P) provide a service to investors by grading fixed income securities based on current research. The rating system indicates the likelihood that the issuer default either on interest or capital payments.rating agencies like
- For S&P, the ratings vary from AAA (the most secure) to C.
- For Moody's, the ratings go from Aaa to D, which means the issuer is already in default.
Only with a rating of BBB or better are considered " grade." BBB are considered to be suitable for by institutions. Anything below the triple-B rating is considered to be junk, or below . ratings are periodically revised based on recent data.
Treasury are not rated because they are backed by the "full faith and " of the United States government. They are considered to be the safest of because the government has the power to levy in order to pay its debts.
Why Does a Rating Matter?
Ratings have huge influence on the price and demand for certain securities, particularly liquidity problems. This is why downgrades (or rumors of downgrades) in an 's rating can have a significant impact on its securities and on the or industry.: The lower the rating, the riskier the and the less the is worth. Low ratings often lead to less trading activity and thus
Preferred stock prices can move sharply when the s ' rating changes (as this is an indicator of the 's ability to meet preferred dividend obligations). Securities that are convertible into a company's debt are also affected by ratings, especially if the convertible security is trading near or above the point at which the holder may convert the security to debt.are not the only securities affected by ratings, however.
Low ratings are not always bad. They simply income investors actively enhance their returns by dividing securities into sectors based on certain characteristics such as rating, yield, , , etc., and then finding those sectors that perform most favorably for the investor under certain conditions.there is more risk associated with an and thus more potential for higher returns. In fact, many
Grouping securities by rating is common because investors are trying to rank default or lose for an investor to lose , however -- remember that the simple threat of default or decline can lower the price of the security. This threat could be sensitivity to adverse business conditions, rumors of a ratings or inaccuracy of ratings agency opinions., buy those positioned to improve and sell those expected to decline. An doesn't need to actually