What is Long-Term Issuer Credit Rating?

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Long-term issuer credit rating is a method of assessing the long-term credit risk of borrowers or issuers. Rating agencies evaluate borrowers or issuers' financial and operational conditions, market environment, political environment, and other factors, and give corresponding rating grades. The rating grades are usually AAA, AA, A, BBB, BB, B, CCC, CC, C, D, etc.

Definition

A long-term issuer credit rating is a method of assessing the long-term credit risk of a borrower or issuer. Rating agencies evaluate factors such as the financial condition, operational status, market environment, and political environment of the borrower or issuer, and assign a corresponding rating grade. The rating grades typically include AAA, AA, A, BBB, BB, B, CCC, CC, C, and D.

Origin

The concept of credit rating originated in the early 20th century, first introduced by Moody's in the United States in 1909. As financial markets developed, credit ratings became an essential tool for assessing the credit risk of companies and governments. Long-term issuer credit ratings, as part of this, focus on evaluating the credit risk of borrowers or issuers over a longer period.

Categories and Features

Long-term issuer credit ratings are mainly divided into investment grade and speculative grade. Investment grade ratings (such as AAA to BBB) indicate lower credit risk, suitable for investors with lower risk tolerance. Speculative grade ratings (such as BB and below) indicate higher credit risk, often accompanied by higher return potential. The features of ratings include stability, transparency, and independence, helping investors make informed decisions.

Case Studies

A typical case is during the 2008 financial crisis when many financial institutions had their long-term credit ratings downgraded. For example, Lehman Brothers was rated A before the crisis, but due to deteriorating financial conditions, it was eventually downgraded to D, leading to bankruptcy. Another case is Apple Inc., whose long-term credit rating has consistently remained high, such as AA+, reflecting its strong financial condition and market position.

Common Issues

Common issues investors face when using long-term issuer credit ratings include over-reliance on ratings and ignoring the dynamic changes in ratings. Ratings are just a reference, and investors should also use other financial analysis tools for a comprehensive evaluation. Additionally, conflicts of interest within rating agencies may affect the objectivity of ratings.

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Non-Negotiable

Non-negotiable refers to certain documents, instruments, or assets that cannot be transferred or endorsed to another party. This means the ownership of these assets or instruments cannot be simply transferred through signature or delivery, but must be handled according to specific rules or procedures. Common examples of non-negotiable documents include certain types of checks, bonds, or stock certificates. This arrangement is typically used to ensure the security of assets or funds and to prevent unauthorized transfer or circulation.

Undivided Account

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Undivided Account

An undivided account is a financial or investment arrangement where multiple participants share full responsibility for the entire account, including both assets and liabilities, rather than dividing them proportionally. This means each participant is responsible for the entire account rather than just their individual share. This arrangement is common in securities underwriting, partnerships, or joint investment projects. For example, in securities underwriting, all underwriters in an undivided account collectively assume responsibility for the entire issuance of securities, regardless of the proportion each underwriter subscribes to. The advantage of this arrangement is better risk distribution, but it also requires a high level of trust and cooperation among the participants.

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Scalping

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Vega Neutral

Vega Neutral is an options trading strategy designed to make a portfolio insensitive to changes in the implied volatility of the underlying asset. Vega is the Greek letter that measures the sensitivity of an option's price to changes in implied volatility. By constructing a Vega neutral portfolio, a trader can eliminate or minimize the impact of volatility changes on their positions, allowing them to focus on other factors such as time decay or changes in the underlying asset's price. Achieving Vega neutrality typically involves combining and hedging different options to bring the overall Vega of the portfolio close to zero.

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Volatility Arbitrage

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Volatility Swap

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