Python for Finance

Chapter 13
6 A3 A- A- 1 1
7 Baa1 BBB+ BBB+ 2 1
8 Baa2 BBB BBB 2 1
9 Baa3 BBB- BBB- 2 1
10 Ba1 BB+ BB+ 3 0
11 Ba2 BB BB 3 0
12 Ba3 BB- BB- 3 0
13 B1 B+ B+ 3 0
14 B2 B B 3 0
15 B3 B- B- 3 0
The first column is for the row numbers, which have no specific meaning. The next
three columns are credit levels for Moody's, S&P, and Fitch, respectively. NAIC
stands for the National Association of Insurance Commissioners. Any ratings equal
to or over BBB are classified as investment grades, see the last column (variable) that
has a value of 1 or 0. Many mutual funds and pension funds are only allowed to
invest bonds rated as investment grades.
When a company has an Aaa rating this year, what is its probability next year to
remain as the same credit rating? According to the following table, the probability
that it keeps its Aaa rating next year is 89%, Moody's (2007). On the other hand, there
is 3% chance that its credit rating would be downgraded by one notch, that is, from
Aaa to Aa1. For a B1 rated bond, the probability of maintaining the same credit rating
is 65%. Jointly, it has 12% probability of upgrading. For a possible downgrade, it has
9% probability. The default probability of a B1 rated bond is 3%, see the last column
of the following figure that gives us the one-year credit rating migration matrix:
One-year credit rating migration matrix
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