You’re thinking of buying a sovereign bond, a.k.a. a government-backed bond. The government tells you they’re solid; they’re totally creditworthy, and will definitely pay you back. But are they telling the truth, or are they selling snake oil? Better look up their sovereign credit rating.
A sovereign credit rating is an independent measure of a nation’s creditworthiness, which can be used to compare nations. In the same way that you have to give a lender your FICO score before they decide how high of a credit limit to give you...or whether or not you qualify for a mortgage...you can look up a nation’s sovereign credit rating. Basically their FICO score.
Unlike your FICO, factors that affect sovereign credit ratings include political craziness, a nation’s debt and defaulting profile, economic growth, and other economic indicators. For bigwig nations, sovereign credit rating isn’t a big deal, because their currencies are strong. Except for in 2008...nobody’s sovereign credit rating was looking too good in 2008, especially Greece’s. For nations farther down the economic ladder, their sovereign credit rating is important. The better their rating, the more capital they can attract from foreign investors.
Where can you find these sovereign credit ratings? Standard & Poor’s, Moody’s, and Fitch are the largest agencies that independently score nations’ creditworthiness.
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Finance: What are credit ratings, and ho...59 Views
finance a la shmoop what our credit ratings and how are they interpreted?
well maybe you've heard your parents groan about all of their accumulated
debt or at least you did in high school and you know how it's sinking them. your [kid asks for dinner]
mom put the new fridge and dishwasher on her Amex and now it's all maxed out. your
dad meanwhile invested in a new set of golf clubs and put his flight to Myrtle
Beach on his visa, and now well your dad might have a nice tan and maybe he's
shaved a few strokes off his game, but you and your sister are eating baked
beans out of the can and taking time to 30-second showers to cut down on you
know gas expenses, so credits evil right? you should only pay for something if
you've got the cash right now in your pocket to pay for it right? well no not
right it's true making purchases on credit and be abused and often is but
building credit ie showing the rest of the world that you can borrow money and
then pay off your purchases responsibly whether you're an individual or a
corporation is absolutely essential in making your way through this vast [computer game labyrinth pictured]
complicated world of ours and establishing your own credit rating. so
what really is a credit rating ?well it's a determination of your ability to pay
your debts fully and in a timely manner. all right well there are three major
credit rating agencies who specialize in making these types of evaluations for
the big boys ie large public corporations who borrow money all the
time. the agencies well they're the ones with catchy names like Moody's Standard
& Poor's and Fitch. note that these three are typically used to determine the
reliability of businesses to pay off their debts.
don't confuse credit rating agencies with credit reporting agencies, of which
the major players are Equifax Experian and TransUnion. those guys publish credit
reports assigning credit scores to individuals. so they determine whether
you're able to get that Prius you've had your eye on or whether you can get [orange Prius pictured]
the keys to a nice new condo or whether you can finally upgrade from your
antique typewriter to Mac. but credit ratings indicate whether
someone might want to trust this or that company to make good on their debts.
check out this table which gives you the rundown of Moody's and SNP ratings right
there. don't worry about Fitch for now they're low man on the totem pole .all
right for Moody's anything rated be a three or better is considered investment
grade. for S&P well it's anything triple b-minus or higher. so both agencies would [credit rating chart pictured]
recommend investing in a company's debt at the top of their class, but for any
failing below this line well they've kind of slapped a junk ish bond label on
it. in other words you know and take your chances. the better the grade the better
a company is done in keeping their books checking their boxes crossing their T's
and dotting your I's and likely it means that they're a low risk. and so
they get cheap interest rate. though the odds are paying back their debts are
high when the risk is low and they're encouraged borrow more money until
they're not a good credit risk. well the ones at the bottom of the barrel are
probably sending weekly emails soliciting funds to you know help [sympathetic woman sits behind a computer]
Nigerian Prince's in distress. so those are credit ratings if you find yourself
in a position to care about them well now you know what they mean and how to
interpret them. as for your personal credit score well just make regular
payments don't spend well beyond your means and refrain from ordering one of
everything off Amazon and you should be just fine. [woman shops from computer]
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