External and Internal Ratings | FRM Tutorial Videos| FRM Online Training & Certification Video Lecture | Risk Management: An Essential Training - Management

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financial risk manager frm par one of
frm exam covers of fundamental tools and
techniques used in risk management and
the theories that underlie their use
external and internal ratings
as discussed in the earlier section
credit rating is applied in both
corporate and government securities
ratings are external as well as internal
in this section we will be discussing
the various aspects of external and
internal ratings we will understand how
the external and internal ratings are
established
agenda we will begin with the
introduction of external ratings and
learned the ratings transition matrix in
credit rating agencies we will also
learn the impact of various geographical
factors and other factors on external
ratings we will discuss the external
factors that have an impact on external
ratings and corporate bonds next we will
begin with the study of internal credit
ratings its process and various issues
involved in establishing internal
ratings we will end with a discussion of
various types of rating biases external
credit ratings external credit ratings
are designed to convey information about
a specific instrument or information
about the entity that issued the
instrument when a company of the
government wishes to issue a bond it
will easily approach one or more of the
external credit rating agencies and
provide access to its business books
including balance sheets cash flow
statements and projections the rating
process was already discussed in the
previous section the rating transition
matrix shows the frequency of default
over a given time horizon for bonds with
a given rating the example that is
highlighted in the slide shows the
transition of a firm from a rating of a
from a default rating which is 0% from a
rating of B to a default which is 5% and
so on we have calculated the probability
that a be rated firm will default over
2-year period we have tabulated it as
shown in the slide
rating process the rating process
usually starts with qualitative analysis
including competition and management
quality the next step is the
quantitative analysis like financial
ratio analysis