The following shows link how to map a PD to a S&P rating:

S&P Rating PD range [%]
AAA [0-0.05)
AA [0.05-0.09)
A [0.09-0.23)
BBB [0.23-1.16)
BB [1.16-5.44)
B [5.44-4.21)
CCC [14.21-)

I know that this mapping only is what the writer of this paper have come up with, but it shows a general trend I have observed by working with credit risk for many years.

Bad risk grades do most often have wider PD ranges than better risk grades. In this table the PD range in B is from 5.44 % to 14.21 % but it for A is 0.09 % to 0.23 %.

Is there a mathematical/statistical reason for that, or it is only practical. With practical I mean that there probably is not so big difference between a PD of 7 or 10 % when you are going to invest in a corporate.

  • 1
    $\begingroup$ One of the challenges of bulding any conordance between grades used by different rating agencies and internally by institutons is that some grading scales may consider with different weights LGD in addition to PD; some may consider PD over different time horizons (1Y, 5Y, 10Y); etc. I rather doubt that any mapping to PD like the one you cited can mean much. $\endgroup$ Jul 16 at 13:39
  • $\begingroup$ The letter grades (AAA, AA, ...) were invented a long time ago (1908?) by non-quant ppl and we don't know the exact thinking behind them, but you are right (and it is an important obs.) that the difference betwen high grades (say AAA vs AA) is much smaller than the difference between lower grades. Possibly Mr. Moody thought that AAA should be very very rare/strictly defined and the lower grades have increasingly lax/imprecise criteria. CCC then would be a broad range of diverse companies which he didn't want to spend time to analyze into finer equal sized categories. He focused on the top. $\endgroup$
    – nbbo2
    Jul 17 at 7:51


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