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                   ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
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CREDIT RATING & ITS
   IMPORTANCE
                  Prepared by

       www.modelexam.in
ONLINE PRACTICE MOCK TEST FOR NISM,NCFM EXAMS
www.modelexam.in
                      ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                   Ph: 98949 49988

            Importance of this session.


CREDIT Rating is an important innovation in financial
services.

Learning will help us to know more about Credit rating
methodologies

Indepth Knowledge in CREDIT Rating methods has got
immense career opportunities
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                ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                             Ph: 98949 49988

             TOPICS COVERED
WHAT IS CREDIT?
WHAT IS CREDIT RATING?
WHAT CREDIT RATING IS NOT?
USES OF CREDIT RATING FOR ISSUERS
USES OF CREDIT RATING FOR INVESTORS
SEBI GUIDELINES FOR CREDIT RATING AGENCIES
CREDIT RATING AGENCIES IN INDIA
  CRISIL
  ICRA
  CARE
LONG TERM, SHORT TERM, MEDIUM TERM CREDIT
RATINGS
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                ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                             Ph: 98949 49988

             TOPICS COVERED
CREDIT RATING MECHANISM
IPO GRADING
IMPACT OF CREDIT RATING IN MOVEMENT OF
BOND PRICES
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Introduction to Credit
       Rating
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           Introduction to CREDIT Rating
What is Credit ?
  Provision of resources by one party to another party.
  The second party does not reimburse the first party
  immediately, and instead arranges either to repay or
  return the resources at a later date.
  It is any form of deferred payment.

  The first party is called a creditor, also known as a lender,
  while the second party is called a debtor, also known as a
  borrower.
  Credit is important since Individuals and Corporations with
  poor credit will have difficulty finding financing and will
  most likely have to pay more due to the risk of default
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                     ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                  Ph: 98949 49988

            What is a credit rating?
A credit rating is an opinion on the relative degree of
risk associated with timely payment of interest and
principal on a debt instrument.
A Credit rating assesses the Credit worthiness (ability
to pay interest and principal in time) of an Individual,
Corporation or even a country.
A simple alphanumeric symbol is used to convey a
credit rating. Credit Ratings are calculated from
Financial History, Current Assets and Liabilities of a
firm and History of borrowing and repayment.
Tells a lender or an investor the probability of default by
borrower (not being able to pay back a loan)
A poor credit rating indicates a high default risk.
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                      ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                   Ph: 98949 49988

           What credit rating is NOT?

Not a recommendation to buy, hold or sell a debt
instrument
A rating is one of the inputs that is used by investors to
make an investment decision
Rating do not comment on the return being offered on
a debt instrument nor are they offered as guarantees
or protections against default. They are opinions only
Rating is specific to the instrument & is not the rating of
the issuer
Ratings are not intended to measure factors such as
liquidity risk, pre-payment risk, interest rate risk, risk of
secondary market loss, or exchange loss risk
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                    ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                 Ph: 98949 49988

       What credit rating is NOT?

A credit rating is not an assurance of repayment of the
rated instrument.
It is possible that some highly rated issuers could
default.
In the US, some instruments rated at even 'AAA' levels
have defaulted. However, such defaults would be less
frequent amongst highly rated instruments than
amongst instruments with lower ratings
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Uses of Credit Rating
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         Uses to Issuers of Securities
Good Credit rating decreases the cost of borrowed
capital. Companies may be able to borrow at a lower
interest owing to their High Credit rating.
Good Credit rating serves as an Additional Certification
Increase the investor population since Investors prefer
safety first.
Merchant Bankers Job Made easy since marketing of
Debt Instruments with High Rating is Easy
Foreign Collaborations made easy
Benefits the industry as a whole
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               Uses to Investors
Low Cost Information

Quick Investment Decision

Independent Investment Decision

Can select or distinguish Risky assets from Safety
ones

Continuous monitoring by CREDIT Rating agencies
gives Investors a knowledge about the company
throughout the life time of Security and hence he can
redeem the security if the rating changes.
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                     Ph: 98949 49988




Credit Rating Agencies
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                    ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                 Ph: 98949 49988

       What is a Credit Rating Agency?
Independent Agency who assess the capacity of the
issuer of the debt security to pay interest and repay the
principal as per the terms and conditions.
They collect a fee from the Issuers for rating their Debt
Securities
They rate an instrument based on parameters like
  • business risk
  • market position
  • operating efficiency
  • adequacy of cash flows
  • financial risk,
  • financial flexibility, and
  • management and industry environment.
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                     ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                  Ph: 98949 49988

       What is a Credit Rating Agency?
Credit Rating is not one time evaluation of Credit Risk.
Agencies continuously monitor the Performance of the
company till the maturity of Particular Security. This is
known as SURVEILLANCE.

Changes affecting the company are taken into account
and the rating, if necessary, is changed, upwards or
downwards. In other words, a rating is valid during the
life of the instrument unless is changed
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          ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
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SEBI Guidelines on Credit
         Rating
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          Important SEBI Guidelines
CREDIT Rating Agencies should be SEBI Registered
Minimum Networth of Rs 5 Crore is needed for a Credit
Rating Agency or an Undertaking to Enhance the
Networth with in a period of 3 Years

SEBI Registration is valid for a Period of 3 Years.

NO Company shall make a Public Issue or rights issue
of Debt Instruments, unless Credit Rating is obtained
from at least one Credit Rating Agency.
SEBI has made grading of IPOs compulsory, effective
May 1 2007.It shall be mandatory to obtain grading
from at least one credit rating agency
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                      ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                   Ph: 98949 49988

                    IPO Grading
IPO grading is the grade assigned by a Credit Rating
Agency (CRAs) registered with SEBI, to the IPO of equity
shares or any other security which may be converted into
or exchanged with equity shares at a later date.

  IPO grade 1    Poor fundamentals
  IPO grade 2    Below Average fundamentals
  IPO grade 3    Average fundamentals
  IPO grade 4    Above average fundamentals
  IPO grade 5    Strong fundamentals
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Credit Rating Mechanism
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                                                 ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
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                              Credit Rating Mechanism
                                                      Credit Risk


        Industry Risk          Business Risk                Management Risk             Financial Risk


      Industry                 Market Position                 Track Record           Existing Fin. Position
      Characteristics

      Industry Financials      Operating Efficiency            Credibility            Future Financial Position


                                                               Payment Record         Financial Flexibility


                                                               Others                 Accounting Quality
• External factors
• Scored centrally once in
  a year
                             • Internal factors
                             • Scored for each borrowing.
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Overview of Credit Rating
   Agencies in India
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                                   Ph: 98949 49988

                       CRISIL
Credit Rating Information Services Limited – CRISIL
  Floated on Jan 1st 1988
  Indias Leading rating Agency and the Fourth largest in
  the world
  Jointly Promoted by Standard & poor, National Stock
  Exchange and other financial Institutions
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            ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
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         CRISIL ratings
           Description
Symbol

AAA        Highest Safety
AA         High Safety
A          Adequate Safety
BBB        Moderate Safety
BB         Inadequate Safety
B          High Risk
C          Substantial Risk
D          Default
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                                          Ph: 98949 49988

     CRISIL ratings for Short Term Instruments


       This rating indicates that the degree of safety regarding
P1     timely payment on the instrument is very strong.
       This rating indicates that the degree of safety regarding
       timely payment on the instrument is strong; however, the
       relative degree of safety is lower than that for instruments
P2     rated 'P1'.
       This rating indicates that the degree of safety regarding
       timely payment on the instrument is adequate; however, the
       instrument is more vulnerable to the adverse effects of
       changing circumstances than an instrument rated in the two
P3     higher categories.
       This rating indicates that the degree of safety regarding
       timely payment on the instrument is minimal and it is likely to
       be adversely affected by short-term adversity or less
P4     favorable conditions.
       This rating indicates that the instrument is expected to be in
P5     default on maturity or is in default.
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                      ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                   Ph: 98949 49988

                         ICRA
Investment Information and Credit Rating Agency of
India Limited - ICRA
   An Associate of Moodys Investor Service
   Second Largest Rating Agency in India
   Promoted by Leading Banks and Financial Institutions
   It Provides Rating Services, Advisory Services,
   Research Services and Economic Research services.
   ICRA ratings are based on an in-depth study of the
   industry as also an evaluation of the strengths and
   weaknesses of the company.
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                      ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                   Ph: 98949 49988


ICRA will look into the following before rating a
security
  Marketing strategies
  competitive edge
  level of technological development
  operational efficiency
  competence and effectiveness of management
  hedging of risks, cash flow, trends and potential
  liquidity, financial flexibility
  government policies
  past record of debt servicing
  sensitivity to possible changes in business/economy
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             Ph: 98949 49988

 ICRA
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             Ph: 98949 49988

 ICRA
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                    Ph: 98949 49988

ICRA Short Term Ratings
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                      ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS
                                   Ph: 98949 49988

                       CARE
Credit Analysis and Research Limited
  Established in 1993
  IDBI and Canara Bank are major promoters. IL&FS
  and other Financial Institutions also hold stake in
  CARE.
  Services Offered by CARE are
   • Credit Rating
   • Equity Research
   • Economic Research
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                                Ph: 98949 49988

Long /Medium -term instruments (NCD/FD/CD/SO/CP)
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Credit Rating of Debt instruments
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CREDIT RATING AND ITS IMPACT ON BOND PRICE
CASE I – Rating Comes Down
“AAA” rated Security was trading at Rs 100/-
Coupon – 8% P.A
Yield of “AA” rated Sec then was 10% P.A
Rating of “AAA” Security comes down to “AA”
Price of the Security will come down to Rs 80/- so as to
yield 10% P.A
Investors who bought “AAA” rated Security at Face
Value would incur a Capital Loss of 20%

RATING COMES DOWN          BOND PRICE COMES DOWN
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CREDIT RATING AND ITS IMPACT ON BOND PRICE

CASE II – Rating Increases
“AA” rated Security was trading at Rs 100/-
Coupon – 10% P.A
Yield of “AAA” rated Sec then was 8% P.A
Rating of “AA” rated Security becomes “AAA”
Price of the Security will increase by Rs 25/- so as to
yield 8% P.A
Investors who bought “AA” rated Security at Face Value
would incur a Capital Gain of 25%

RATING INCREASES          BOND PRICE INCREASES
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Credit rating ppt by www.modelexam.in

  • 1. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CREDIT RATING & ITS IMPORTANCE Prepared by www.modelexam.in ONLINE PRACTICE MOCK TEST FOR NISM,NCFM EXAMS
  • 2. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Importance of this session. CREDIT Rating is an important innovation in financial services. Learning will help us to know more about Credit rating methodologies Indepth Knowledge in CREDIT Rating methods has got immense career opportunities
  • 3. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 TOPICS COVERED WHAT IS CREDIT? WHAT IS CREDIT RATING? WHAT CREDIT RATING IS NOT? USES OF CREDIT RATING FOR ISSUERS USES OF CREDIT RATING FOR INVESTORS SEBI GUIDELINES FOR CREDIT RATING AGENCIES CREDIT RATING AGENCIES IN INDIA CRISIL ICRA CARE LONG TERM, SHORT TERM, MEDIUM TERM CREDIT RATINGS
  • 4. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 TOPICS COVERED CREDIT RATING MECHANISM IPO GRADING IMPACT OF CREDIT RATING IN MOVEMENT OF BOND PRICES
  • 5. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Introduction to Credit Rating
  • 6. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Introduction to CREDIT Rating What is Credit ? Provision of resources by one party to another party. The second party does not reimburse the first party immediately, and instead arranges either to repay or return the resources at a later date. It is any form of deferred payment. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower. Credit is important since Individuals and Corporations with poor credit will have difficulty finding financing and will most likely have to pay more due to the risk of default
  • 7. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What is a credit rating? A credit rating is an opinion on the relative degree of risk associated with timely payment of interest and principal on a debt instrument. A Credit rating assesses the Credit worthiness (ability to pay interest and principal in time) of an Individual, Corporation or even a country. A simple alphanumeric symbol is used to convey a credit rating. Credit Ratings are calculated from Financial History, Current Assets and Liabilities of a firm and History of borrowing and repayment. Tells a lender or an investor the probability of default by borrower (not being able to pay back a loan) A poor credit rating indicates a high default risk.
  • 8. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What credit rating is NOT? Not a recommendation to buy, hold or sell a debt instrument A rating is one of the inputs that is used by investors to make an investment decision Rating do not comment on the return being offered on a debt instrument nor are they offered as guarantees or protections against default. They are opinions only Rating is specific to the instrument & is not the rating of the issuer Ratings are not intended to measure factors such as liquidity risk, pre-payment risk, interest rate risk, risk of secondary market loss, or exchange loss risk
  • 9. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What credit rating is NOT? A credit rating is not an assurance of repayment of the rated instrument. It is possible that some highly rated issuers could default. In the US, some instruments rated at even 'AAA' levels have defaulted. However, such defaults would be less frequent amongst highly rated instruments than amongst instruments with lower ratings
  • 10. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Uses of Credit Rating
  • 11. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Uses to Issuers of Securities Good Credit rating decreases the cost of borrowed capital. Companies may be able to borrow at a lower interest owing to their High Credit rating. Good Credit rating serves as an Additional Certification Increase the investor population since Investors prefer safety first. Merchant Bankers Job Made easy since marketing of Debt Instruments with High Rating is Easy Foreign Collaborations made easy Benefits the industry as a whole
  • 12. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Uses to Investors Low Cost Information Quick Investment Decision Independent Investment Decision Can select or distinguish Risky assets from Safety ones Continuous monitoring by CREDIT Rating agencies gives Investors a knowledge about the company throughout the life time of Security and hence he can redeem the security if the rating changes.
  • 13. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Credit Rating Agencies
  • 14. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What is a Credit Rating Agency? Independent Agency who assess the capacity of the issuer of the debt security to pay interest and repay the principal as per the terms and conditions. They collect a fee from the Issuers for rating their Debt Securities They rate an instrument based on parameters like • business risk • market position • operating efficiency • adequacy of cash flows • financial risk, • financial flexibility, and • management and industry environment.
  • 15. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What is a Credit Rating Agency? Credit Rating is not one time evaluation of Credit Risk. Agencies continuously monitor the Performance of the company till the maturity of Particular Security. This is known as SURVEILLANCE. Changes affecting the company are taken into account and the rating, if necessary, is changed, upwards or downwards. In other words, a rating is valid during the life of the instrument unless is changed
  • 16. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 SEBI Guidelines on Credit Rating
  • 17. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Important SEBI Guidelines CREDIT Rating Agencies should be SEBI Registered Minimum Networth of Rs 5 Crore is needed for a Credit Rating Agency or an Undertaking to Enhance the Networth with in a period of 3 Years SEBI Registration is valid for a Period of 3 Years. NO Company shall make a Public Issue or rights issue of Debt Instruments, unless Credit Rating is obtained from at least one Credit Rating Agency. SEBI has made grading of IPOs compulsory, effective May 1 2007.It shall be mandatory to obtain grading from at least one credit rating agency
  • 18. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 IPO Grading IPO grading is the grade assigned by a Credit Rating Agency (CRAs) registered with SEBI, to the IPO of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. IPO grade 1 Poor fundamentals IPO grade 2 Below Average fundamentals IPO grade 3 Average fundamentals IPO grade 4 Above average fundamentals IPO grade 5 Strong fundamentals
  • 19. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Credit Rating Mechanism
  • 20. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Credit Rating Mechanism Credit Risk Industry Risk Business Risk Management Risk Financial Risk Industry Market Position Track Record Existing Fin. Position Characteristics Industry Financials Operating Efficiency Credibility Future Financial Position Payment Record Financial Flexibility Others Accounting Quality • External factors • Scored centrally once in a year • Internal factors • Scored for each borrowing.
  • 21. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Overview of Credit Rating Agencies in India
  • 22. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CRISIL Credit Rating Information Services Limited – CRISIL Floated on Jan 1st 1988 Indias Leading rating Agency and the Fourth largest in the world Jointly Promoted by Standard & poor, National Stock Exchange and other financial Institutions
  • 23. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CRISIL ratings Description Symbol AAA Highest Safety AA High Safety A Adequate Safety BBB Moderate Safety BB Inadequate Safety B High Risk C Substantial Risk D Default
  • 24. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CRISIL ratings for Short Term Instruments This rating indicates that the degree of safety regarding P1 timely payment on the instrument is very strong. This rating indicates that the degree of safety regarding timely payment on the instrument is strong; however, the relative degree of safety is lower than that for instruments P2 rated 'P1'. This rating indicates that the degree of safety regarding timely payment on the instrument is adequate; however, the instrument is more vulnerable to the adverse effects of changing circumstances than an instrument rated in the two P3 higher categories. This rating indicates that the degree of safety regarding timely payment on the instrument is minimal and it is likely to be adversely affected by short-term adversity or less P4 favorable conditions. This rating indicates that the instrument is expected to be in P5 default on maturity or is in default.
  • 25. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 ICRA Investment Information and Credit Rating Agency of India Limited - ICRA An Associate of Moodys Investor Service Second Largest Rating Agency in India Promoted by Leading Banks and Financial Institutions It Provides Rating Services, Advisory Services, Research Services and Economic Research services. ICRA ratings are based on an in-depth study of the industry as also an evaluation of the strengths and weaknesses of the company.
  • 26. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 ICRA will look into the following before rating a security Marketing strategies competitive edge level of technological development operational efficiency competence and effectiveness of management hedging of risks, cash flow, trends and potential liquidity, financial flexibility government policies past record of debt servicing sensitivity to possible changes in business/economy
  • 27. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 ICRA
  • 28. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 ICRA
  • 29. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 ICRA Short Term Ratings
  • 30. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CARE Credit Analysis and Research Limited Established in 1993 IDBI and Canara Bank are major promoters. IL&FS and other Financial Institutions also hold stake in CARE. Services Offered by CARE are • Credit Rating • Equity Research • Economic Research
  • 31. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Long /Medium -term instruments (NCD/FD/CD/SO/CP)
  • 32. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Credit Rating of Debt instruments
  • 33. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CREDIT RATING AND ITS IMPACT ON BOND PRICE CASE I – Rating Comes Down “AAA” rated Security was trading at Rs 100/- Coupon – 8% P.A Yield of “AA” rated Sec then was 10% P.A Rating of “AAA” Security comes down to “AA” Price of the Security will come down to Rs 80/- so as to yield 10% P.A Investors who bought “AAA” rated Security at Face Value would incur a Capital Loss of 20% RATING COMES DOWN BOND PRICE COMES DOWN
  • 34. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CREDIT RATING AND ITS IMPACT ON BOND PRICE CASE II – Rating Increases “AA” rated Security was trading at Rs 100/- Coupon – 10% P.A Yield of “AAA” rated Sec then was 8% P.A Rating of “AA” rated Security becomes “AAA” Price of the Security will increase by Rs 25/- so as to yield 8% P.A Investors who bought “AA” rated Security at Face Value would incur a Capital Gain of 25% RATING INCREASES BOND PRICE INCREASES
  • 35. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 WWW.MODELEXAM.IN CLICK THE LINK ABOVE TO WRITE ONLINE PRACTICE MOCK TEST FOR NISM,NCFM,BCFM,MUTUAL FUND (EARLIER AMFI) EXAMS