Credit Analysis

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DEFINITION of 'Credit Analysis'

A type of analysis an investor or bond portfolio manager performs on companies or other debt issuing entities encompassing the entity's ability to meet its debt obligations. The credit analysis seeks to identify the appropriate level of default risk associated with investing in that particular entity.

INVESTOPEDIA EXPLAINS 'Credit Analysis'

By identifying companies that are about to experience a change in debt rating, an investor or manager can speculate on that change and possibly make a profit. For example, assume a manager is considering buying junk bonds in a company, if the manager believes that the company's debt rating is about to improve, which is a signal of relatively lower default risk, then the manager can purchase the bond before the rating change takes place, and then sell the bond after the change in rating at a higher price.

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RELATED FAQS
  1. Why do high profiting sales mitigate credit risk?

    High profit sales reduce credit risk by providing a greater profit incentive in case the borrower is unable to pay the debt. ... Read Full Answer >>
  2. What does investment grade mean?

    Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills and notes. Most companies ... Read Full Answer >>
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