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In this lesson, we learned about the three different credit organizations that rate a company’s debt. Those three organizations are Standard and Poors, Fitch, and Moody’s.
Although each of these organization do the same thing, we learned that the scoring techniques and accuracy is different.
It’s very important to understand the risks associated with each credit rating, and that’s why we compared the chance of default to the letter score.
Understanding the chance of default provides an investor actual data to determine their appetite for risk.
When assessing the risk between a corporate bond and a municipal bond, we know that the letter rating system is flawed because the historical percentages are drastically different. This is something every investor should think about before investing in a AAA municipal bond.
In the end, we learned that each investor needs to determine their own risk and make judgments for themselves. Remember the greatest risk is not knowing what you’re doing. So do your research and think about what credit scores actually mean.