Published Online: 15 MAY 2010
Copyright © 2010 John Wiley & Sons, Ltd. All rights reserved.
Encyclopedia of Quantitative Finance
How to Cite
Ashcraft, A. and Schuermann, T. 2010. Credit Rating. Encyclopedia of Quantitative Finance. .
- Published Online: 15 MAY 2010
A credit rating represents an overall assessment of the creditworthiness of a borrower. In this way the rating is a forecast, and like all forecasts it is noisy. For that reason, credit rating agencies make use of discrete ratings. Such a rating may also be generated by a model internal to a financial institution like a bank for the assessment of credit risk, specifically for the probability of default. Ratings typically depend on firm (or household) financial information such as indebtedness (leverage), revenue, profitability, and so on. Because defaults are rare, it is very difficult to assess the accuracy of a given rating model. Although the rating scale for structured credit products is the same as for single obligor ratings, risk assessment is quite different. Corporate bond (obligor) ratings are largely based on firm-specific risk characteristics. Since asset-backed structures represent claims on cash flows from a portfolio of underlying assets, the rating of a structured credit product must take into account systematic risk.
- credit risk;
- credit rating;
- probability of default;
- risk management