Security Analysis and Portfolio Management Assignment

Security Analysis and Portfolio Management - Assignment Example It was originated in USA and the first credit rating agency was set up in New York. Credit rating can be defined as the way of evaluating the credit worth of a debtor. According to Moody’s a rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security (Gurusamy, 2009, p.88-89). In general, the evaluation of the various securities is done by the credit rating agencies regarding the ability of the debtor to pay back the financial obligations and the probability of becoming a defaulter. In addition, credit rating is also used by the individuals and business ventures that purchase bonds which are issued by the government and companies in order to determine the possibility that company or the government will fulfill its bond obligations. The credit rating is based on the records of earlier repayment and borrowing. Apart from that, the credit rating is also done on the basis of the company’s availability of assets and liabilities. ... Some of the factors are convenient and some are inconvenient. A poor credit rating of the companies or the government indicates that they have high chances of not fulfilling the obligations. A credit rating also highlights about the credit quality and credit risk. The desirable characteristics of a credit rating are as follows: - Specificity: - The rating is in accordance with or specific to the debt instrument. Relativity: - The rating is based on the willingness and the relative capability of the instrument issuer to service the obligations of the debt specific to the terms of the contract. Guidance: - The credit rating is aimed to provide guidance to the investors regarding the credit risk associated with an investment. Qualitative and Quantitative: - In order to determine the credit grade, both qualitative as well as quantitative factors are used. The judgment made is however qualitative in nature. Not a Recommendation: - The rating does not provide any kind of recommendations to hold, buy or sell the instruments. This is because of the fact that credit rating does not take into consideration factors such as personal risk preferences, market prices and other factors that may impact the investment decision. Broad Parameters: - The credit rating is based on some of the parameters of information provided by the issuer and information collected from other sources. No Guarantee: - The rating as provided by the agency does not provide any assurance for the accuracy and completeness of the information regarding the factors of rating. The increasing importance and stupendous growth of crediting rating system has been mainly due to the globalization of the credit market, moving trends towards the privatization, due to the withdrawal