Credit Ratings: (Just) One Component of Investment Risk

Investors and regulators alike strive to understand the comprehensive investment risk each fixed-income security contributes to an investor’s cash flow requirements because understanding risk is the first step towards mitigating it. In this commentary, we assess the different types of investment risk and look at how investors can use our credit ratings to get insight into the credit risk component of overall investment risk.

Key Highlights:
-- Credit ratings give insight into one aspect of investment risk.
-- Interest rates, credit spreads, and liquidity also affect the price of securities.
-- Investors should understand all components of investment risk, and credit ratings are a step towards achieving this.

“While our credit ratings are not intended to capture the entirety of investment risk, they provide visibility into the credit risk of a fixed-income security,” says Brian Grow, Global Head of Investor Strategy at Morningstar DBRS. “Most fixed-income securities contain credit risk, and a credit rating provides a unique and insightful building block in understanding the full picture of fixed-income investment risk.”