What is Credit Ratings of financial instrument?

What is Credit Ratings of financial instrument?

Credit  rating  is,  essentially,  the  opinion of   the  credit  rating  agency  on   the relative  ability of   the  issuer  of   a   debt  instrument to  meet  the  debt  service obligations (about that particular debt) as and   when they arise. This opinion is given on  the basis of  past performance and   all  available  information (audited financial statements,  audit reports, information from management, banks and  FIs, industry trends  and   management  capabilities).  The  rating  is  for  a   particular instrument and  not for the company as a  whole, two debt instruments issued by one issuer may  have different ratings.

Credit  rating  is  an    opinion  expressed   by    an    independent  professional organization, after making detailed study of  all  relevant factors. Such opinion is of   great  assistance  to  the  investors  as  it  helps  them  in   taking  investment decisions. It  also helps the issuer  in  determining the price and  interest rate of the debt instrument under consideration. There are three important credit rating agencies in India  :

 

(i)     Credit Rating Information Services of India  Limited (CRISIL).

(ii)     Investment Information and  Credit Rating Agency of India  (ICRA).

(iii)     Credit Analysis & Research  Limited (CARE).

Credit rating  is  expressed  in  the  form of   symbols,  this  helps  in  their  easy understanding.  (For  example:  CRISIL’s   AAA   expresses  a   long-term   debt's highest safety and  timely payment of  principal and  interest.) Plus symbol is used to indicate finer distinctions within a rating category. 

A  rating is an  opinion given at a  particular  point of  time. As the  time passes, many  things  change  affecting  the  debt  servicing  capacity,  the  change  may upgrade or downgrade the rating.

A rating is neither an  investment advice nor it is a recommendation to buy  or sell the security that has been rated by  the credit agency. A credit rating is not a guarantee against future losses.


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