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By Staff Reporters
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Credit analysis is a form of financial analysis used primarily to determine the financial strength of the issuer of a security, and the ability of that issuer to provide timely payment of interest and principal to investors in the issuer’s debt securities. Credit analysis is typically an important component of security analysis and selection in credit-sensitive bond sectors such as the corporate bond market and the municipal bond market.
Credit default swap index (CDX) is a credit derivative, based on a basket of CDS, which can be used to hedge credit risk or speculate on changes in credit quality.
Credit default swaps (CDS) are credit derivative contracts between two counterparties that can be used to hedge credit risk or speculate on changes in the credit quality of a corporation or government entity.
Credit quality reflects the financial strength of the issuer of a security, and the ability of that issuer to provide timely payment of interest and principal to investors in the issuer’s securities. Common measurements of credit quality include the credit ratings provided by credit rating agencies such as Standard & Poor’s and Moody’s. Credit quality and credit quality perceptions are a key component of the daily market pricing of fixed-income securities, along with maturity, inflation expectations and interest rate levels.
Credit Rating Agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In the United States, the Securities and Exchange Commission (SEC) permits investment banks and broker-dealers to use credit ratings from “Nationally Recognized Statistical Rating Organizations” (NRSRO) for similar purposes. As of January 2012, nine organizations were designated as NRSROs, including the “Big Three” which are Standard and Poor’s, Moody’s Investor Services and Fitch Ratings.
Credit rating downgrade, by a credit rating agency (Standard & Poor’s, Moody’s or Fitch) means reducing its credit rating for a debt issuer and/or security. This is based on the agency’s evaluation, indicating, to the agency, a decline in the issuer’s financial stability, increasing the possibility of default. A downgrade should not to be confused with a default; a debt security can be downgraded without defaulting. And, conversely, a debt issuer can suddenly default without being downgraded first–credit ratings and credit rating agencies are not infallible.
Credit ratings are measurements of credit quality provided by credit rating agencies. Those provided by Standard & Poor’s typically are the most widely quoted and distributed, and range from AAA (highest quality; perceived as least likely to default) down to D (in default). Securities and issuers rated AAA to BBB are considered/perceived to be “investment-grade”; those below BBB are considered/perceived to be non-investment-grade or more speculative.
Credit risk is the inability or perceived inability of the issuers of debt securities to make interest and principal payments will cause the value of those securities to decrease. Changes in the credit ratings of debt securities could have a similar effect.
Credit Risk Transfer Securities (CRTS) are unsecured obligations of the GSEs (Government Sponsored Enterprises). Although cash flows are linked to prepays and defaults of the reference mortgage loans, the securities are unsecured loans, backed by general credit rather than by specified assets.
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Filed under: "Ask-an-Advisor", Accounting, Career Development, Ethics, Financial Planning, Funding Basics, Glossary Terms, Industry Indignation Index, Investing, LifeStyle, Taxation | Tagged: CDS, CDX, CRA, credit analysis, credit default swaps, credit downgrade, credit rating agency, credit ratings, credit risk, Credit Risk Transfer Securities, CRTS, default, finance, FITCH, GSEs, Investing, investment grade, Moody's, NRSRO, SEC, Standard & Poor's | Leave a comment »
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