Posted in Finance, Accounting and Economics Terms, Total Reads: 715
It is the second or third highest credit rating given to any institution that issue debt obligation. These institutions can be companies, banks, governments and government bodies. It signifies that the risk of default is relatively low as the carrier or issuer is relatively stable. The risk taken by policy holder or investors is relatively less with these companies.
The ratings assigned by various rating agencies are based upon the creditworthiness of the insurer or issuer. The ratings are a direct measure of the probability to default. A/A2 can be read as the insurer or issuer being rated as high quality and low on credit risk in long term ratings and has high ability to repay short term debt in short term ratings. Credit stability and priority of payments are also factored into the rating. The rating should not be construed as a recommendation nor should it be the sole reason for an investment. Rating higher than A/A2 are A+/A1 and lower are A-/A3 and similar. The ratings affect the interest rate of a bond, if the ratings are higher, the risk of default will be lower, and thus the interest rate will also be lower as compared to a bond who has a low rating which will have a high interest rate to attract buyers. The price of such securities are generally higher due to high ratings and low rate of interest. The ratings are issued by rating agencies like Standards & Poors, Moody’s, Fitch etc.
For example: A person who wants to buy a bond and is a risk averse investor can look at the credit rating of the security. If he/she opts for low risk of default and wants an assured repayment, they can opt A/A2 rated issuers or insurers. The interest rate for the issued security will be low because of less risk taken.