CREDIT MIGRATON

SUBMITTED BY:
ANMOL
ROLL NO: 056
MEANING

It refers to upgrading or worsening in a

credit's ranking and credit grade over time.

Credit Migration Risk is the risk that a

portfolio's credit quality will materially
deteriorate over time without allowing a re
pricing of the constituent loans to
compensate the creditor for the now higher
default risk being undertaken.
EXAMPLE

credit migration risk in Student Loan

Portfolios: When prepayment penalties are
not imposed, a long-dated student loan
portfolio is exposed to the risk of retaining a
greater proportion of poor credits as time
unfolds than was anticipated at origination.
And because spreads are inflexible after
origination, the creditor may no longer be
fairly compensated for default risk.
Cr ed it R atin g R is k Af fec ts C or por ate Bo nd s

CREDIT MIGRATION risk describes the risk

of the potential for direct loss due to
internal/ external ratings downgrade or
upgrade as well as the potential indirect
losses that may arise from a credit migration
event, also referred to as credit-rating risk
or downgrade risk.
 The key here is what investors perceive.
For example, many times when a corporate bond has its credit
rating lowered, its price will go down as well. The reality is,
however, that its not the credit rating going down that directly
lowers the price.
Instead, its the perceived value of that bond in the minds of
investors that is responsible for the price drop.
So there is more to it than simply the credit rating as that is only
one of the things investors take into account when determining
the price of a corporate bond. This also means that the price of a
bond can also go down before an interest rate drop.
The price of a bond can also decline because of other investor
concerns. Likewise, any raise in the interest rate of a bond may
also lead to the bonds price going up.
THANK YOU