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FRM Part II · FRM Exam Part II · Fundamentals of Credit Risk

A bank compares through-the-cycle (TTC) ratings with point-in-time (PIT) ratings when building a transition matrix for stress testing. Which statement is correct?

Through-the-cycle ratings are designed to be stable across the economic cycle, so they migrate less, but the realized default rate within a given grade varies over time. Point-in-time ratings migrate more with conditions and keep grade default rates steadier.

  1. ATTC ratings tend to show more migration and default-rate volatility within each grade across the cycle than PIT ratings
  2. BPIT ratings respond quickly to current conditions, so grade default rates are more stable only if economic conditions are constant
  3. CTTC ratings aim to be stable over the cycle, so they typically show less rating migration but greater variation in realized default rates within a grade over timeCorrect
  4. DPIT ratings are unaffected by the economic cycle, so they produce constant default rates for each grade

Explanation

TTC ratings look past cyclical effects, giving more stable ratings and lower migration, but a given grade's realized default rate varies with the cycle. PIT ratings migrate more but keep grade default rates more stable. The first option reverses this, and the last is false because PIT ratings are highly cycle sensitive.

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