Bond Rating and Credit Risk

Credit rating is a risk grade, which credit rating institutions assign to bonds based on economic environments, industry characteristics, competitive situations, management abilities, and financial situations by using scientific rating methods and technologies. The risk grade effectively denotes the relative credit risk of bonds and can serve as references for investors in making investment decisions. This paper is divided in two sections: the first section discusses the relation between bonds' rating and their credit risk, and the second section analyzes the development of Chinese and American credit rating industries in order to make credit rating more clear to China and help develop our credit rating industry.