Question

1. Why is the credit rating necessary for credit analysis? Use one rating system to show the usefulness.

Answer 1

Credit rating is important to assess the credit borrowing companies performance and the commitments it makes so as to enhance the awareness of trust among the stakeholders of credit lending companies and credit borrowing companies. Credit rating is done by a team of professionals whose object is to decide whether the credit borrower has a capability to pay back on an agreed term with the agreed interest charged over the principal. Based upon the history of such expectations met, the rating could range in between fair to excellent. On the grounds of late or failure of credit payback, the rating could also go down. But not by this sole reason could a credit rating be influenced , there are many other factors that can contribute as well. Advantage of the credit rating could be facilitating the investors an understanding about the bond rating and grades, risk involved and assurance that a bond company can offer to the bondholders.

Credit rating system is useful as businesses and governments with the high credit ratings that can build reputation among the investors and bond holders. Loans applied can be easily approved.