AIMs: Discuss the ratings performance for corporate bonds. Describe the relationship between the rating agencies and regulators and identify key regulations that impact the rating agencies and the use of ratings in the market. Discuss some of the trends and issues emerging from the current credit crisis relevant to the rating agencies and the use of ratings in the market.
Questions:
23.1. In regard to the ratings performance of corporate bonds, each of the following is true EXCEPT:
a. Corporate credit ratings are intended to look through-the-cycle (rather than point-in-time)
b. Over the long run, ratings have been accurate in their ordinal function: on average, there has been an inverse relationship between credit rating and at least short-run default rates
c. On average over the long run, higher ratings have been more stable (less volatile)
d. Ratings that predict default with perfect accuracy plot as a 45-degree line on a Lorenz curve (cumulative accuracy profile, CAP).
23.2. In regard to the relationship between rating agencies and regulators, each of the following is true EXCEPT:
a. The Credit Rating Agency Reform Act of 2006 abolishes the registration, and designation, of Nationally Recognized Statistical Rating Organizations ("NRSROs")
b. The Credit Rating Agency Reform Act of 2006 vested the SEC with the authority to establish a registration and oversight program for credit rating agencies
c. Dodd-Frank removes references to ratings from the Securities Exchange Act and a number of other statutes.
d. Dodd-Frank requires federal agencies like the SEC and Federal Reserve to remove references to ratings from their own regulations when those ratings are used to assess the creditworthiness of a security or money market instrument
23.3. In regard to the relationship between credit ratings and Basel III, each of the the following statements is true EXCEPT for which of the following? (please note: this question is not source from the assigned Altman, which is too dated for this AIM):
a. Basel III eliminates and prohibits the use of external credit ratings in the standardized approach to credit risk
b. Basel III gives national supervisors the responsibility for determining on a continuous basis whether an external credit assessment institution (ECAI) meets certain eligibility criteria
c. The Basel III eligibility criteria for an ECAI include: objectivity, independence, international access/transparency, disclosure, resources, and credibility
d. Basel III also requests that national supervisors refer to the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies when determining ECAI eligibility.
Answers:
Questions:
23.1. In regard to the ratings performance of corporate bonds, each of the following is true EXCEPT:
a. Corporate credit ratings are intended to look through-the-cycle (rather than point-in-time)
b. Over the long run, ratings have been accurate in their ordinal function: on average, there has been an inverse relationship between credit rating and at least short-run default rates
c. On average over the long run, higher ratings have been more stable (less volatile)
d. Ratings that predict default with perfect accuracy plot as a 45-degree line on a Lorenz curve (cumulative accuracy profile, CAP).
23.2. In regard to the relationship between rating agencies and regulators, each of the following is true EXCEPT:
a. The Credit Rating Agency Reform Act of 2006 abolishes the registration, and designation, of Nationally Recognized Statistical Rating Organizations ("NRSROs")
b. The Credit Rating Agency Reform Act of 2006 vested the SEC with the authority to establish a registration and oversight program for credit rating agencies
c. Dodd-Frank removes references to ratings from the Securities Exchange Act and a number of other statutes.
d. Dodd-Frank requires federal agencies like the SEC and Federal Reserve to remove references to ratings from their own regulations when those ratings are used to assess the creditworthiness of a security or money market instrument
23.3. In regard to the relationship between credit ratings and Basel III, each of the the following statements is true EXCEPT for which of the following? (please note: this question is not source from the assigned Altman, which is too dated for this AIM):
a. Basel III eliminates and prohibits the use of external credit ratings in the standardized approach to credit risk
b. Basel III gives national supervisors the responsibility for determining on a continuous basis whether an external credit assessment institution (ECAI) meets certain eligibility criteria
c. The Basel III eligibility criteria for an ECAI include: objectivity, independence, international access/transparency, disclosure, resources, and credibility
d. Basel III also requests that national supervisors refer to the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies when determining ECAI eligibility.
Answers:
