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.

BREAKING DOWN '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 is it important for an investor to understand business accounting?

    Investors use financial statements to obtain valuable information used in valuation and credit analysis of companies. Therefore, ... Read Full Answer >>
  2. 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 >>
  3. 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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    The maximum Social Security disability benefit amount for a single eligible person in 2015 is $1,165 per month, but you can ... Read Full Answer >>
  5. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
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    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>

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