Credit Rating presented by Sabine Wolff International Finance Prof. Jasper Kim

Definition  credit rating evaluate the credit worthiness of an individual, corporation or a country  in general CR are calculated from financial history and current assets and liabilities  3 types: 1. Personal credit rating of Individuals 2. Sovereign Credit Rating f. ex. of countries 3. Corporate Bond Credit Rating

1.Personal Credit Rating affects ability of individuals to borrow money through financial institutions such as banks affects ability of individuals to borrow money through financial institutions such as banks low credit rating low credit rating  high risk of defaulting on a loan  thus leads to high interest rates or creditor refuse the loan

2.Sovereign Credit Rating indicates risk level of the investing environment of a country is used by investors looking to invest abroad (political risk) RankPreviousCountry Overall score 1 1Luxembourg Norway Switzerland Denmark Sweden Ireland92.36

3.Corporate Bond Credit Rating credit rating of a corporation for potential investors, who want to invest in debt securities such as bonds credit rating of a corporation for potential investors, who want to invest in debt securities such as bonds high grade down grade high grade down grade low credit risk high credit risk low credit risk high credit risk high probability more uncertainty of high probability more uncertainty of of future payments future payments of future payments future payments  effect on share value is also possible

Qualitative and Quantitative Credit Rating (1) 1. Qualitative CR determination: combination of financial data, company interviews and other market information determination: combination of financial data, company interviews and other market information subjective subjective criteria: criteria: net income for the year (annual surplus) net income for the year (annual surplus) planning- and controlling instruments planning- and controlling instruments corporate management and -strategy corporate management and -strategy information behaviour to shareholder information behaviour to shareholder accounting maintenance accounting maintenance

Qualitative and Quantitative Credit Rating (2) 2. Quantiative CR avoid all opinion and bias  focus only on financial data and ratios avoid all opinion and bias  focus only on financial data and ratios Quantitative rating agencies use sophisticated software to compute ratings Quantitative rating agencies use sophisticated software to compute ratings benefit: ratings are more updated and analyst opinion does not come into the valuation benefit: ratings are more updated and analyst opinion does not come into the valuation Index for: Index for: assets and liabilities structureassets and liabilities structure liquidityliquidity earning powerearning power productivityproductivity capital structurecapital structure

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