 Solution

A credit rating is an agency's ordered assessment of an issuer's or particular obligation's capacity and willingness to meet its promised payments. Corporate and sovereign issuers are classified on letter scales, with finer notches, broad investment-grade and speculative-grade groupings, and default categories. Agencies such as Standard & Poor's, Moody's and Fitch also revise ratings as information changes; sovereign assessments involve public finances and institutional or political factors as well as debt-servicing capacity.

A credit rating summarizes relative creditworthiness rather than specifying an exact, immutable credit default probability. Historical defaults and migrations within rating classes can inform a statistical model. Assuming a homogeneous Poisson process within one class is a simplifying choice: it posits a constant event intensity and independent increments, neither of which follows merely from a shared rating. The credit risk model must also distinguish default frequency from loss given default severity.