Course 2 Unit 2 Lesson 2: What is the S&P Rating?

Introduction

• Objective: Understand credit ratings and what they tell about risk.
• Focus on different credit ratings and their impact on investors.

Major Credit Rating Agencies

• Moody's
• S&P (Standard & Poor's)
• Fitch
• All agencies have similar rating schemes.

Credit Rating Scale

• Prime Investment: Highest rating, indicating strong ability to repay debts.
• In Default: Lowest rating, indicating inability to repay debts.
• Categories:
  • Investment Grade: Above Triple B minus or Baa3 (Moody's).
  • Non-Investment Grade: Below this threshold, considered speculative.

Importance in Investing

• Bonds vs. Stocks:
  • Bonds: Look for high credit ratings like AAA.
  • Stocks: Prefer companies with minimal debt and high credit ratings.
• Assess risk tolerance when investing.

Risk Assessment

• Charts & Statistics:
  • Ratings alone don't convey risk without associated statistics.
  • Example: AAA corporate bonds have 0.52% (Moody's) and 6% (S&P) default risk.
  • BB ratings reflect higher risk (19% to 30% default rate).

Comparison of Ratings

• Moody's is more conservative compared to S&P.
• Investment Grade Bonds:
  • Moody's: 2% default risk.
  • S&P: 4% default risk.
• Non-Investment Grade Bonds:
  • Higher default risk (31% to 42%).

Municipal vs. Corporate Bonds

• AAA Corporate Bonds: Comparable risk to BBB Municipal Bonds.
• Consider municipal bonds as potentially safer investment.

Key Advice from Warren Buffett

• "A public opinion poll is no substitute for thought."
• Use statistics and evidence-based decisions rather than assumptions.

Conclusion

• Understand the statistics behind credit ratings.
• Measure your own risk tolerance and knowledge in investing.
• Lesson takeaway: Credit ratings provide insight into risk, but deeper analysis is needed for informed investing decisions.