AIM: Describe what a rating scale is, what credit outlooks are, and the difference between solicited and unsolicited ratings. Identify Standard and Poor’s and Moody’s rating scales and distinguish between investment and noninvestment grade ratings.
Questions:
21.1. Which of the following is a TRUE statement about credit ratings?
a. A rating downgrade on a bond is analogous to a sell recommendation on a stock
b. Moody's ratings measure only probability of default (PD) only, whereas S&P ratings measure expected loss (i.e., PD*LGD)
c. A long-term rating that is BBB- or above (in the case of S&P) and Baa3 (in the case of Moody's) is considered Investment Grade
d. A bond which has either been downgraded or modified with "-" (S&P) or "3" (Moody's) cannot be considered Investment Grade
21.2. The United Kingdom (UK) has an 'Aaa' rating from Moody's. However, Moody's recently announced they were attaching a negative outlook to the rating. Which of the following best summarizes the implication of the negative outlook?
a. UK retains the triple-A rating, but there is a possibility of a downgrade in the future
b. UK retains the triple-A rating, but a downgrade is inevitable while only the timing is uncertain
c. UK retains the triple-A rating, but is no longer considered "investment grade"
d. The UK rating technically becomes AAA- or Aaa3
21.3. On May 5th, 2005, the following was reported about a downgrade of General Motors, but the actual rating is replaced by [?]: "General Motors was downgraded to a non-investment, or speculative, grade of [?] by S&P on May 5, 2005, reflecting S&P’s ‘conclusion that management’s strategies may be ineffective in addressing GM’s competitive disadvantages. Still, GM should not have any difficulty accommodating near-cash requirements. The downgrading was due to a number of factors, including GM’s falling share of the US car market, and the impending health care and retirement costs of its numerous and aging workforce." Given the information provided, this downgrade was most likely to which of the following ratings?
a. A
b. BB
c. BBB
d. CC
Answers:
Questions:
21.1. Which of the following is a TRUE statement about credit ratings?
a. A rating downgrade on a bond is analogous to a sell recommendation on a stock
b. Moody's ratings measure only probability of default (PD) only, whereas S&P ratings measure expected loss (i.e., PD*LGD)
c. A long-term rating that is BBB- or above (in the case of S&P) and Baa3 (in the case of Moody's) is considered Investment Grade
d. A bond which has either been downgraded or modified with "-" (S&P) or "3" (Moody's) cannot be considered Investment Grade
21.2. The United Kingdom (UK) has an 'Aaa' rating from Moody's. However, Moody's recently announced they were attaching a negative outlook to the rating. Which of the following best summarizes the implication of the negative outlook?
a. UK retains the triple-A rating, but there is a possibility of a downgrade in the future
b. UK retains the triple-A rating, but a downgrade is inevitable while only the timing is uncertain
c. UK retains the triple-A rating, but is no longer considered "investment grade"
d. The UK rating technically becomes AAA- or Aaa3
21.3. On May 5th, 2005, the following was reported about a downgrade of General Motors, but the actual rating is replaced by [?]: "General Motors was downgraded to a non-investment, or speculative, grade of [?] by S&P on May 5, 2005, reflecting S&P’s ‘conclusion that management’s strategies may be ineffective in addressing GM’s competitive disadvantages. Still, GM should not have any difficulty accommodating near-cash requirements. The downgrading was due to a number of factors, including GM’s falling share of the US car market, and the impending health care and retirement costs of its numerous and aging workforce." Given the information provided, this downgrade was most likely to which of the following ratings?
a. A
b. BB
c. BBB
d. CC
Answers:
