Credit ranking agencies grade Obligation products.
Credit grading agencies play a vital role in the economy. They analyse financial counsel and ratio risks implicit in corporate activities. Structured finance products maintenance firms hedge (protect against) financial risks.
Credit Rating Agency Defined
A credit grading agency, again recognized as a classifying agency, applies math-based formulas and statistical tools to analyse a collection's financial data and scale its Obligation as "junk" or "investment-grade." A "junk" bond is a dicy asset. For instance, a structured asset may combine junk and investment-grade products.
Structured Finance Market Significance
The market for structured products is larger than the market for traditional assets, such as bonds or stocks. This is due to the fact that structured assets may be hybrid assets, combining both equity and debt features.Credit risk is the loss probability arising from a borrower's default due to bankruptcy.
Structured Finance Product Defined
A structured finance product is a debt security with multiple features, such as risk levels, maturity dates and investment strategies. Investment-grade is the contrapositive of junk.
Function
A rating agency helps an investor measure credit risks implicit in a company's activities.Credit Rating Agency Role
Credit rating agencies help investors make sound and well-informed asset-selection decisions, because they provide inside into the loss expectation related to structured finance products. For instance, an investor buying a junk bond is aware of the bond risk measure.
