Question

Describe the significance of rating in relation to credit risk. Illustrate your answer with some examples

Answer 1

Credit rating It is assessment of creditworthiness of borrower .It shows the repaying capacity of borrower .It  is assigned by credit rating agency to borrower at the time of raising fund.

Significance

• High credit rating helps business to borrow money from financial institution ,from public in form of bonds.
• Enterprise can achieve better deals and opportunities in business.
• Benefit of reduction in insurance premium can be achieved by improving credit rating.
• Good credit rating improve corporate image.
• Fund can be borrowed at lower cost.

Illustration

S & P(Standard & Poor's ) is credit rating agency

Credit rating Meaning  

AAA High quality of bond with lowest degree of risk

AA+,AA-,A- High quality with slight degree of risk

A+,A-,A Not of high quality but with many positive qualities

BBB+,BBB-,BBB Bonds of medium quality ,unreliable over long term