AIMs: Describe the difference between an issuer-pay and a subscriber-pay model and what concerns the issuer-pay model engenders. Describe and contrast the process for rating industrial and sovereign debt and describe how the distributions of these ratings may differ.
Questions:
22.1. In regard to issuer-pay and subscriber-pay business models, each of the following is true EXCEPT for:
a. Prior to 1970, the business model for all rating agencies was subscriber-pay
b. A "rate shopper" is an issuer who seeks to hire an agency because it expects to receive a more favorable rating; and rate shopping is a more acute problem in the issuer-pay model than under the subscriber pay model
c. Since the SEC's adopted conflict of interest rules in the wake of the Crisis, all of the 10 nationally nationally recognized statistical rating organizations (NSRSROs) have either adopted subscriber-pay models or are at least shifting toward the subscriber-pay model
d. Subscriber-pay is a difficult business model for fundamental credit ratings because fundamental research is costly; a published rating is a public (or semi-public) and non-exclusive good; and issuers often need the rating more than investors
22.2. Which of the following is a TRUE statement about sovereign credit ratings?
a. To maintain objectivity, agencies endeavor to avoid qualitative factors in rating sovereign debt
b. Sovereigns are graded on the same ordinal scale (AAA, AA, ...) as corporate credits
c. The foreign currency debt rating of an industrial corporation should be unrelated to the sovereign rating of its host country
d. It is much easier to evaluate the performance of sovereign ratings vis-a-vis defaults, than it is to evaluate corporate ratings, due to the long history of the world; e.g., Reinhart and Rogoff
22.3. Which of the following is LEAST LIKELY to be a strong determinant of a sovereign credit rating?
a. National culture; e.g., Hofstede's index
b. Political stability
c. Economic growth; e.g., GDP per capita, real GDP growth
d. External debt, liquidity and currency status; e.g., external debt/exports
Answers:
Questions:
22.1. In regard to issuer-pay and subscriber-pay business models, each of the following is true EXCEPT for:
a. Prior to 1970, the business model for all rating agencies was subscriber-pay
b. A "rate shopper" is an issuer who seeks to hire an agency because it expects to receive a more favorable rating; and rate shopping is a more acute problem in the issuer-pay model than under the subscriber pay model
c. Since the SEC's adopted conflict of interest rules in the wake of the Crisis, all of the 10 nationally nationally recognized statistical rating organizations (NSRSROs) have either adopted subscriber-pay models or are at least shifting toward the subscriber-pay model
d. Subscriber-pay is a difficult business model for fundamental credit ratings because fundamental research is costly; a published rating is a public (or semi-public) and non-exclusive good; and issuers often need the rating more than investors
22.2. Which of the following is a TRUE statement about sovereign credit ratings?
a. To maintain objectivity, agencies endeavor to avoid qualitative factors in rating sovereign debt
b. Sovereigns are graded on the same ordinal scale (AAA, AA, ...) as corporate credits
c. The foreign currency debt rating of an industrial corporation should be unrelated to the sovereign rating of its host country
d. It is much easier to evaluate the performance of sovereign ratings vis-a-vis defaults, than it is to evaluate corporate ratings, due to the long history of the world; e.g., Reinhart and Rogoff
22.3. Which of the following is LEAST LIKELY to be a strong determinant of a sovereign credit rating?
a. National culture; e.g., Hofstede's index
b. Political stability
c. Economic growth; e.g., GDP per capita, real GDP growth
d. External debt, liquidity and currency status; e.g., external debt/exports
Answers:
