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GLOSSARY

AAA rating definition

Published by a LexisNexis Pensions expert

What does AAA rating mean?

The highest credit rating for a bond or company.

The risk of default is (or was) considered to be negligible. AA rated bonds (slightly higher risk) are used as the basis for valuing pension scheme liabilities in company accounts.

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Credit ratings

Role The role of credit rating agents (CRAs) is to provide an objective and analytical opinion on the risk of payment defaults by looking at various factors that help investors decide whether to invest in particular securities. Investors in capital markets are very sensitive to risk and some investors are prevented by their internal constitutional documents from investing in low grade securities. Generally, the higher the investment risk, the greater the return (interest/coupon) the investor will seek.Both (i) the company issuing the security instruments and (ii) the security instruments themselves can be rated. An issuer’s debt securities may be rated separately from the issuer where the issuer is a company specially set up for the issuance (a special purpose vehicle or where the debt securities benefit from credit enhancements (eg a guarantee) to make them stronger than the standing rating of their issuer.By way of example, the following may be rated:•the issuer•senior debt/syndicated loans•medium term notes (MTNs)•commercial paper (CP)•fixed income securities•sovereign debt•residential mortgage backed securities (RMBS)•commercial mortgage backed securities (CMBS)CRAs typically look...

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