Fixed Income MCQ - Fixed Income Section 2

56 Based on the practice of notching by the rating agencies, a subordinated bond from a company with an issuer rating of BBB would likely carry what rating?

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The subordinated bond would have its rating notched lower than the company’s BBB rating by one notch.

57 An investor buys AAA-rated bonds and wants to hold it to maturity. He expects that since the bond is AAA rated the bond will continue to have the lowest probability of default till maturity. Is the investor correct?

Investor is incorrect because rating agencies may review and change rating at any time before maturity. If the rating is downgraded in the future, it reflects greater probability of default.

58 Which of the following is least likely a risk of relying on rating from credit rating agencies?

Among the mentioned list the “default risk is difficult to assess” is not the risk of relying on ratings from the credit rating agencies.

59 Which of the following is least likely to be a limitation of a credit rating agency’s ratings?

Options A and C are true statements and represent limitations of credit ratings. Option B does not represent a limitation. Credit ratings can be used to compare bonds across different industries.

60 An analyst observed that the market price of a bond changed faster than the credit rating of that bond. The limitation of credit agency ratings witnessed here is most likely:

The mentioned limitation is that credit ratings lag market pricing.