Study Notes: External and Internal Ratings

Topic Progress:

Chapter 4. External and Internal Credit Ratings Study Notes contain 35 pages covering the following learning objectives:

* Describe external rating scales, the rating process, and the link between ratings and default.
* Describe the impact of time horizon, economic cycle, industry, and geography on external ratings.
* Define and use the hazard rate to calculate unconditional default probability of a credit asset.*
* Define recovery rate and calculate the expected loss from a loan.*
* Explain and compare the through-the-cycle and at-the-point internal ratings approaches
* Describe alternative methods to credit ratings produced by rating agencies.*
* Compare external and internal ratings approaches.
* Describe and interpret a ratings transition matrix and explain its uses.
* Explain the potential impact of ratings changes on bond and stock prices.
* Explain historical failures and potential challenges to the use of credit ratings in making investment decisions.

After reviewing the notes, you will be able to apply what you learned with practice questions.

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