Credit Analysis

AAA

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.

RELATED TERMS
  1. Credit Business Fellow - CBF

    A designation for achievers who have proven knowledge in intermediate ...
  2. Judgmental Credit Analysis

    A method of approving or denying credit based on the lender's ...
  3. Bond Rating

    A grade given to bonds that indicates their credit quality. Private ...
  4. Junk Bond

    A colloquial term for a high-yield or non-investment grade bond. ...
  5. Default Risk

    The event in which companies or individuals will be unable to ...
  6. Municipal Bond

    A debt security issued by a state, municipality or county to ...
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 >>
  3. Which asset classes are the most risky?

    Equities is the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the ... Read Full Answer >>
  4. How do you find accrued interest on a bond?

    A bond is a debt instrument issued by a company, government agency or municipality to raise money. Interest payments are ... Read Full Answer >>
  5. What are the main disadvantages of fixed income securities?

    Fixed-income securities attract investors because they provide guaranteed returns in the form of fixed, regular cash payments. ... Read Full Answer >>
  6. Which factors most influence fixed income securities?

    The main factors that impact the prices of fixed income securities include interest rate changes, default or credit risk, ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

    Don't be fooled by the name - junk bonds may be for you if you know how to analyze them.
  2. Investing Basics

    How To Create A Modern Fixed-Income Portfolio

    Exposure to different asset classes is required to generate income, reduce risk and beat inflation. Find out how bonds can help.
  3. Credit & Loans

    Analyzing A Career In Credit Analysis

    If you're a number-cruncher and responsibility doesn't scare you, this could be the job for you.
  4. Mutual Funds & ETFs

    Pros & Cons Of Bond Funds Vs. Bond ETFs

    Understanding the pros and cons of bond funds and bond ETFs will help you choose the instrument that is best for building your diversified bond portfolio.
  5. Mutual Funds & ETFs

    Pros and Cons: Preferred Stock ETFs vs. Bond ETFs

    A look at the differences between preferred stock ETFs and bond ETFs and when you should invest in one over the other.
  6. Bonds & Fixed Income

    Understanding Negative Rates Of Europe's Central Banks

    We are currently seeing negative central bank deposit rates and government and corporate bonds with negative yields, but there are investors buying into these securities. Why?
  7. Economics

    The Fed's Impact On Emerging Markets

    Higher US interest rates could make it more expensive for emerging market borrowers to service their debt commitments.
  8. Investing

    What’s The Essence Of Smart Beta In Fixed Income?

    In essence, smart beta strategies seek to re-write index rules to capture factors, such as value, quality, or low volatility, in their stock portfolios.
  9. Bonds & Fixed Income

    Should Junk Bond ETFs Be a Part of Your Portfolio?

    Should junk bonds be a part of your portfolio? Here's what you need to know.
  10. Professionals

    Vanguard Readies Muni Bond ETF

    Vanguard is set to roll out a muni bond ETF, the firm's first.

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center