Overview Of Cras And Its Effect On Investment Portfolios
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CRAs are like a marking system that is designed to keep the interested/related parties informed with relevant information. It helps investors to decide how risky it is to invest in certain security or country. It gives indication to buyer of securitised debt how likely they are to be paid back. Although investors collect their own set of information about borrowers and impose requirements, they also rely on these ratings to determine the appropriate securities for their investment portfolios because it is believed that CRAs crucial role is to provide ‘gatekeepers’ to public security markets and act as a neutral third-parties providing independent, objective assessment of the creditworthiness of investments offered, firms and…show more content… Then in 1975, SEC officially recognised S&P’s, Moody’s and Fitch Group as NSROs. Now these three owns about 90% of the market share . The market shares of current rating agencies are provided in Appendix 2.
Credit rating methodology, process and techniques used by CRAs
Some CRAs uses analyst- driven methodology, some uses model-driven methodology and some uses mixture of both. Appendix 3 shows how analyst-driven methodology works where as model-driven are based upon quantitative data. Financial instruments are rated based upon information provided to CRAs by the issuer. Firms create pool of assets and sells to investors who purchase those pools of assets by using debt securities. Then they hire CRAs to rate those securities. CRAs assign ratings to the specific financial instruments such as corporate bonds, MBS and CDOs rather than issuer of these instruments. We can find a similarity on ratings assigned by these big three agencies. The commonly used scales are letter grade such as AAA, AA, A, BBB and so on with pluses and minuses as well. The triple-A being highest ratings, followed by AA, then A and so on. The triple-A ratings represent safest instrument, AAA to BBB represents investment grade while ratings below this level means securities have higher risk of default . It was assumed that securities with AAA