Abstract
The literature on credit-risk modeling reflects some confusion about how credit-risk models relate to traditional bond ratings. An explanation of how Moody's defines categories and develops bond ratings helps clarify how analysts can use ratings as well as models to analyze credit risk. An important aspect is the historical relationship between default rates and ratings. Although the default rate has been quite volatile over time and the geographical and industrial composition of the issuers and issues that Moody's has been rating has changed considerably since 1920, the relationship between bond rating categories and default rates has remained fairly stable.
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