Are Credit Ratings Absolute Measures Of Default Probability?

Answer 1

Credit ratings are not exact measures of the probability that a certain issuer or issue will default instead, they expressions of the relative credit risk of rated issuers and debt instruments.

Most rating agencies, rank order the issuers and issues from strongest to weakest based on their relative creditworthiness and credit quality.

For example, a AAA rated issue has a higher credit quality than a BBB issue.

Similarly, if we compare the historic data, the annual average default rate of BBB rated issues was 0.30%. this does not mean that it is a prediction that, any BBB rated issue has a 0.30% default probability. It may so happen that, this year the default rate could be 0.6% or even 0.2%. in fact, the actual default rates for any specific rating category may fluctuate over time and are governed by the economic factors.