Lesson 4 of 7 · 14 min
Credit ratings: uses and limits
Credit ratings are a quick, symbol-based ranking of default risk that markets rely on heavily, but they lag prices, miss some risks and can simply be wrong.
In short
- Moody's, S&P and Fitch assign forward-looking, symbol-based ratings of an issue's or issuer's default risk (and potential loss).
- Investment grade: Baa3 (Moody's) / BBB− (S&P, Fitch) or higher. High yield (speculative, junk): Ba1 / BB+ or lower.
- Uses: easy comparison across issuers, a broad read on credit conditions, triggers in covenants and step-up coupons, and regulatory or contractual requirements.
- Ratings are paid for by the issuer. Agencies can see non-public information and also issue outlooks.
- Limits: ratings are sticky and lag market prices, some risks are hard to capture, and analysis can miss or misjudge events. Do your own analysis.
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