Credit Analysis and Risk Management-FIN625-Assignment No 1
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| FIN625 Assignment No 1 Solution 2020-VU-Autumn Fall 2020 of VU related to Autumn Semester has been provided in this article to guide students |
Total Marks: 10
Due Date: December 09, 2020
Topic: Credit Rating
Question Statement
Credit ratings gauge the creditworthiness of different groups such as
individuals, corporations, and countries. These are calculated by using
past financial information, current assets, and liabilities, etc. Normally,
credit ratings indicate the position of a borrower to pay back a loan. Hence, ratings
represent a summary of credit risk for different transactions and parties. Nowadays,
credit ratings popularly represent an understandable means of communication in
financial institutions and in investor groups. Therefore, in today’s global financial
world, credit ratings can play a very important role in many dimensions.
Keeping in view the above information, you are required to answer the following question with a logical discussion.
Required:
1. List down and discuss in detail the different applications of credit ratings in today’s global financial environment. (Marks 10)
Answer
Credit Rating
Credit Rating is used to evaluate the creditworthiness of an individual, corporation, and even a country. In other words, it tells you the ability and capacity of an individual, company, and even a country to pay off its debt.
This creditworthiness is determined through the statistical analysis of the available credit data. This has been carried out by different agencies globally such as Moody, Fitch Ratings, and internally established to handle the local affairs of the countries regarding credit matters, for instance, Credit Bureau in the United States and PACRA in Pakistan established in 1994.
List of Applications of Credit Rating
1. Individual
2. Corporation-company
3. Sovereign or Country Based
Individual
To counter the application of credit rating from the individual perspective in a more illustrative way, let takes up a local rating agency Credit Bureau of United States which responsible for compiling and maintaining of credit history of both individuals and companies.
A 3-digit credit score is being used as a credit rating as issued by the independent financial service companies such as FICO (Fair Isaac Corporation established in late 1950 as a pioneer of the credit rating concept).
The credit score of an individual along with a credit report plays a significant role in approval or disapproval of loan requests from a financial institution like a bank.
The following elements may influence a person’s credit rating too.
v The ability to pay off a loan
v Interest
v Amount of credit loan
v Saving patterns
v Spending patterns
v Debt
Corporate
Potential investors of debt securities have a high concern about the credit ratings of a company at the time of issuing debt instruments like bonds. Credit Ratings actually are indications of the degree of riskiness associated with that particular company. A good rating means low risk, investment in bond (say) is secure but the return is low too, and vice versa. The credit agencies like Standard and Poor’s, Moody’s, and FITCH are involved in assigning letter such as AAA, B, CC, B+ to represent the sensitivity of credit score in terms of riskiness.
Sovereign
Sovereign credit rating basically reflects the credit score of a sovereign entity that is a country. International firms, multinational companies assess the investment environment of a country on the basis of its credit ratings and lead them to decide either to invest in that country or not.
Factors that may influence the credit rating of a country like Pakistan include:
1. Political Stability
2. In-efficient economy-means cost of doing business is very high
3. Red Tape’s Activities
4. Legal Problems
5. Link with Terrorist activities ( as Pakistan is in Greylist of FATAF)
Recently the Current Government is succeeded to pass the laws
inline with the guidance of the FATAF (Financial Action Task Force) to get rid of
the issue of the grey list in the upcoming session will be held in February 2021