What are Corporate Debt Rating Systems? Why is it important to monitor ratings over time?


What is Corporate Debt Rating Systems? Why is it important to monitor ratings over time?

Credit Rating Agency:

The credit rating agency is the agency that conducts an evaluation of a company and rates its securities based on the sounded and stability of the company and the security. These are the independent agencies that work to evaluate the soundness of the company for investors to take an ideal decision.

Answer and Explanation:

Corporate credit rating is the mechanism through which the assessment and evaluation of the soundness of the company is done. The financial stability is analyzed whether the company will be able to pay back its obligations as committed or not. Credit rating is done on the basis of past performances of the company, the strength in the management, project stability, social responsibilities done by the company and more. The importance of corporate debt rating system as elucidated below:

Advantages for the investors:

Advantages for the investors:

  • The ratings give investors assurance of the company they are planning to invest in. They know in advance of the risk and returns expected from

the security. This way the investors are prepared in advance.

  • The investors are aware of the credibility of the issuer company and its financial soundness.
  • The rating is easy to understand. Even if the investors don't have in-depth knowledge they get a rough idea about the company and investments.
  • The investor's don't need to pay to the professionals to explain them and guide them about the investments.

The advantages for issuer company are as given:

  • Higher credit rating improves the value and goodwill of the company.
  • Credit rating assures more investments for the securities of the company and more liquid fund availability.
  • Rating acts as a marketing tool for the securities of the company. The rating helps in building the image of the company in the minds of the

investors and develops their confidence in investing in the company.

Learn more about this topic:

Investment Risks: Definition & Types

from Finance 305: Risk Management

Chapter 3 / Lesson 3

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