Essential Concepts in Fixed Income Investing II

This chapter shows how the ideas in fixed income markets are applied by market participants. It reviews the central role and methodologies of credit rating agencies. Credit ratings are opinions about credit risk. Issuers and obligations are commonly grouped into two broad categories: investment grade and speculative. Ratings are also assigned to individual obligations. Rating agencies try to apply a consistent methodology when assigning ratings to issuers in the same sector and to similar obligations. Credit ratings are only useful to investors if they contain timely information about how likely an issuer is to default and the likely recovery rate in the event of default. Environmental, social, and governance factors can have an important impact on credit ratings. Credit ratings contain valuable information about the credit quality of issuers and obligations, and many market participants rely on that information when making investment decisions.