What is a Credit Union
Credit rating is the credit worthiness of debt issuer determined by credit rating agencies. Debt issuer can be corporation or government. Issuing a debt means raising funds for a project by selling bonds to the investors. Credit rating decides the possibility of achieving returns on investment made in any corporation.
Even governments are scrutinized for credit rating. Credit rating of governments is used by foreign investors to ascertain the profitable countries where they can reap maximum profits by setting a business entity there. Setting business in foreign country is exposed to risk of political ideologies and tolerance towards foreign investments. The assessment of a government is termed as sovereign rating.
Credit rating agencies do not apply any mathematical formula to arrive at proper verdict. In fact, past performances and future growth prospects are few parameters which determine the credit worthiness of any corporation. Poor credit rating implies that corporation in question has higher chances of defaulting. Final decision is ending with the investors to take risk on such corporations.
Corporate credit rating is a big business. The main players in this field are Standard & Poor’s, A.M. Best and Fitch. These agencies use letters like A, B, C to allocate ratings to the corporations. U.S. Treasury bonds are the safest unsecured bonds.
Credit ratings are fixed on various scales. All scales determine the possibility of timely meeting of financial obligations. Credit rating process is designed to ensure dependability and accuracy of the information. Ratings can be carried out in larger timeframe as well as shorter time period. The rating process normally takes three to four weeks.
Auditing is an important exercise to establish credit rating. Process audit, cost audit and resource audit provide clear picture about the position of the company. The past performance and maintenance of faith of investors in terms of surety of returns help to maintain strong credit rating.
Credit rating is also consulted before making investments in stocks and bonds. A good performing bond is expected to yield returns up to 50% in time span of five years and above. Portfolio type and sectors chosen for investing money by fund houses are some of the factors to ascertain credit rating of that bond.
The most common credit rating used these days is short term rating. The probability of default of the company within a year is assessed in this credit rating system. Investors in today’s scenario do not look for long term locking of money and they love to diversify their portfolio. Banks are bound to publish their credit rating every financial year. With short term rating management of derivatives and bonds is easily carried out. This allows investors to make prompt and quick decision about investment portfolio.