{"id":175598,"date":"2020-09-01T19:32:00","date_gmt":"2020-09-01T23:32:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/trading-lessons\/credit-ratings-2\/"},"modified":"2024-01-19T13:30:23","modified_gmt":"2024-01-19T18:30:23","slug":"credit-ratings-2","status":"publish","type":"trading-lessons","link":"https:\/\/www.interactivebrokers.com\/campus\/trading-lessons\/credit-ratings-2\/","title":{"rendered":"Credit Ratings"},"content":{"rendered":"

While corporate bond investors should conduct their own due diligence on a proposed debt instrument, and its issuer, in large part by closely analyzing a company\u2019s financial health, operational risks, interest-rate environment, and impacts from central bank policies, they may also take into account third-party analysis from credit ratings agencies.<\/span><\/span> <\/span><\/span><\/p>\n


\nYou may recall that investors in this asset class are more concerned with income generation and capital preservation rather than on growth, and, as such, are primarily focused on the return of their principal when the bond matures, as well as their timely receipt of interest payments as long as the debt is held.<\/span><\/span> <\/span><\/span><\/p>\n

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By analyzing credit risk, a corporate bond investor is essentially evaluating the likelihood a company may default on its debt obligations \u2013 which is the primary objective of credit ratings agencies such as Moody\u2019s Investors Service, S&P Global Ratings, and Fitch Ratings, among others.<\/span><\/span> <\/span><\/span><\/p>\n

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The level of credit risk posed by a specific corporate bond, as well as by its issuer, generally indicates the severity of default risk an investor assumes. <\/span><\/span> <\/span><\/span><\/p>\n

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To rank this severity, credit ratings agencies typically use a scale. This scale categorizes the creditworthiness of most issuers of corporate debt, as well as their debt offerings, with designations usually divided into investment-grade (\u2018AAA\u2019-\u2018BBB\u2019) and lower-quality (\u2018BB\u2019-\u2018C\u2019) credits.<\/span><\/span><\/p>\n

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\"corporate<\/p>\n

A corporate bond issuer assigned an investment-grade credit rating is considered by that ratings agency to be more likely to make timely debt service payments than those deemed non-investment-grade \u2013 which are also referred to as \u2018high-yield\u2019, \u2018speculative\u2019 or \u2018junk\u2019 bond issuers.<\/p>\n

Corporate bond investors are generally compensated for higher degrees of credit risks in the form of higher interest rates.<\/p>\n

For example, using the Global Bond Scanner in the IBKR Trader Workstation, we\u2019ll show how coupons on different grades of corporate bonds differ in value.<\/p>\n

For illustrative purposes, we\u2019ll select a corporate bond with an investment-grade credit rating by both Moody\u2019s and S&P, such as \u2018A\u2019-rated Huntington National Bank\u2019s bond due February 4, 2030, which carries a 2.55% coupon. Meanwhile, a non-investment-grade, \u2018BB\u2019-rated bond by Colombian financial services firm Grupo Aval, which was issued on the same day as Huntington National\u2019s sale, and which matures on exactly the same date, carries a much larger 4.375% coupon. <\/em><\/p>\n

\"tws\"Overall, credit ratings agencies generally aim to provide a well-detailed, fundamental assessment about a corporate bond issuer, and its debt offering, for investors to factor into their investment decisions.<\/p>\n

They may provide an analysis of:<\/p>\n