IFT Notes for Level I CFA® Program
R55 Fundamentals of Credit Analysis
4.1. Credit Ratings
Be familiar with what the ratings are (Aaa represents the highest quality among investment grade securities, etc.). The rating system is almost similar across agencies starting from A for investment grade to C/D for junk.
- Bonds rated AAA/Aaa have the highest quality, lowest credit risk and lowest probability of default. They have extremely low default rates.
- Bonds rated Baa3/BBB- or higher are investment grade bonds. Investment grade is further divided into high-quality, upper medium and low-medium.
- Bonds rated lower than Baa3/BBB- are non-investment grade bonds. Non-investment grade includes speculative and default bonds. These have higher default risk.
- Outlook: This is an additional indicator on a rating. The outlook can be positive, stable, or negative.
- The rating agencies may also indicate the potential direction of the ratings by including comments like “on review for a downgrade” or “on credit watch for an upgrade.”