Create a factor
Bond credit ratings are common in the fixed income side of the finance world as a simple measure of how "risky" a certain bond might be. Here, riskiness can be defined as the probability of default, which means an inability to pay back your debts. The Standard and Poor's and Fitch credit rating agency has defined the following ratings, from least likely to default to most likely:
AAA, AA, A, BBB, BB, B, CCC, CC, C, D
This is a perfect example of a factor! It is a categorical variable that takes on a limited number of levels.
To create a factor in R, use the factor()
function, and pass in a vector that you want to be converted into a factor.
Suppose you have a portfolio of 7 bonds with these credit ratings:
credit_rating <- c("AAA", "AA", "A", "BBB", "AA", "BBB", "A")
To create a factor from this:
factor(credit_rating)
[1] AAA AA A BBB AA BBB A
Levels: A AA AAA BBB
A new character vector, credit_rating
has been created for you in the code for this exercise.
This exercise is part of the course
Introduction to R for Finance
Exercise instructions
- Turn
credit_rating
into a factor usingfactor()
. Assign it tocredit_factor
. - Print out
credit_factor
. - Call
str()
oncredit_rating
to note the structure. - Call
str()
oncredit_factor
and compare the structure tocredit_rating
.
Hands-on interactive exercise
Have a go at this exercise by completing this sample code.
# credit_rating character vector
credit_rating <- c("BB", "AAA", "AA", "CCC", "AA", "AAA", "B", "BB")
# Create a factor from credit_rating
credit_factor <-
# Print out your new factor
# Call str() on credit_rating
# Call str() on credit_factor