welcome to course 2 unit 2 lesson two what is the S&P rating in this lesson we're going to learn what is a credit rating and we're also going to learn what does a rating tell me about risk so let's get started so this is a pretty short lesson and all I'm doing is uh highlighting different credit ratings and how they impact you as an investor so when we look at this chart um we have the three different major credit rating companies which is Moody's the S&P and also Fitch and they basically have the exact same uh rating scheme here you'll see as you go to Moody's um they have a a big a with two lowercase A's where S&P uses three capital A's but it's all the same thing it's all the same scale and as you look at this scale um over on the right hand side if you focus over there on the right hand side you can see that at the very top we have a prime investment meaning it doesn't get any better this is a company that is absolutely going to be able ble to repay their debts and then at the very bottom as you look down at the bottom the lowest is in default okay and that's what you really want to stay away from because that's a company that's going under and they're going to go bankrupt or even a municipal government or a state government that's going to go bankrupt and so they're not going to be able to repay their loans so if you're buying a bond and let's say you bought a AAA Bond uh the chances of that company or government repaying you all your coupons and then giving you your part value back at the end of the investment is very good with a prime investment for one that's rated in default it's very bad it's not it's it's not likely um and then everything in between is something that you would have to figure out and so as you go down the scale the the the two main categories here as you look at this chart is that there's investment grade and then there's non-investment grade and so everything that's above the uh Triple B minus or the the the B lowercase aa3 for Moody um everything above that is considered investment grade anything below that is non-investment and understood as being speculative so that's pretty important to understand so this can work for bonds or this can work for stocks if you say you're considering buying a stock and you're kind of concerned because maybe the company has a little bit more debt than what you'd like what you could do is you could go into the corporate page you could look up the information on the company and you could look at the debts that they have and look at their bonds and when you look at their bonds you could see what the uh category is for those bonds that the company has out so if you're looking at a company and they have a bunch of AAA bonds that's probably a company that's in no circumstances going to be in trouble to repay those debts which is a good thing that's what you're looking for especially when you're buying stocks you want to buy a stock that has very minimal debt and if they do have debt it needs to have a very high credit rating now when you're buying bonds you can maybe flirt with coming a little bit lower but that's all based on the amount of risk that you're willing to assume so the thing that I get frustrated with whenever I look at charts like this is what does a doublea bond mean to you how much risk is that and there's no way a person can actually answer that question without knowing numbers that are associated with that rating and so I kind of laugh when I see these charts because they really don't tell anybody anything because there's no statistics behind it so I'm going to throw some statistics behind it to kind of show you what some of those ratings equal now unfortunately I just have Moody's in the S&P numbers here but it's pretty neat to kind of look at this chart and you can see the comparison so that number up there is in a how many of them actually defaulted based off of percent so as we look at the very top the AAA rating for Moody's if you were a municipal government both Moody's and the S&P if you had that rating there was a 0% chance of you actually going in default but if you were a corporation you can see for Moody's it was was 0.52% and for uh the S&P it was 6% so that's how much risk um you can put a number on it how much risk was associated with that rating uh for both of those organizations so let's go down and if you remember I said the ba or the BB is whenever things start becoming speculative in non-investment grade and if you look at those numbers um you can see a drastic change in the numbers now something I find kind of interesting is is let's look at the corporation number for the BB for Moody's that went to 19% of those companies went into default 20% that's really high in my opinion um when you look at the S&P they actually had almost 30% so S&P you can see has a much more liberal rating compared to moodies that's much more conservative and consistent so as we look um when we when we go even lower you can see how much higher those um those numbers go so when you look into the C category especially for corporations uh 70% for both U Moody's and the S&P that's extremely high so if you're buying bonds that are down there uh there's only about a 30% chance you're going to get your money back which is really really low so it's nice to know numbers Behind these letters which mean absolutely nothing to anybody uh for a person who who's intimately involved with buying and selling bonds so when you look down there at the numbers for the averages if you're buying investment grade bonds for corporations with a moody rating uh there's only a 2% chance that it's going to fail um for the S&P it's double that it's 4% which is very significant when you look at how they're rating these things now for non-investment grade the numbers go much higher especially for corporations you're at the 31 to 42% range so something that is really interesting uh people will look at a AAA uh rating for a corporation but that's almost the same as being down there in a triple B for a municipal and that's something that people really don't understand or or have any idea about so if you if you're comfortable buying a AAA corporate bond you should be equally uh comfortable buying a triple B Municipal Bond because the numbers are actually better than the AAA corporate so that's something to really think about whenever you're buying bonds and think about this chart and how secure those municipal bonds are as you go into a lower category and and rating so what's important here's something that I will strongly suggest and this is a quote from Warren Buffett is a public opinion poll is no substitute for thought so just because a lot of people are scared to go out and buy that triple triple B uh Municipal Bond doesn't mean you should be I mean you can back up your thoughts with calculations with Statistics and you can put some numbers to what's going on don't just buy into what somebody said oh you should only buy AAA bonds you can look at this and determine things for yourself looking at the letters is pointless you need to understand the statistics behind the letters so that's something that I encourage you to go out there and seek and do some more research on as you become more interested in investing in Bonds in the end you need to measure your own tolerance for risk and be real realistic in what you actually know and that's some of the best advice I can give you for investing in bonds and also for investing in stocks so this concludes course 2 unit 2 lesson two what is the S&P rating in this lesson we learned about what the credit rating was and we learned what does the rating tell us about risk and so I'll see you in the next lesson