CFA Level I · CFA Level I Exam · Credit Risk
A bond is rated A by one agency and carries a stable outlook. Compared with a bond with the same rating but a negative outlook, the bond with the negative outlook is most likely to:
A negative outlook signals a higher probability of a downgrade over the medium term than a stable outlook. The current rating is unchanged, so the bond is not immediately reclassified as non-investment grade. The outlook only indicates the likely direction of the rating.
- Abe immediately reclassified as non-investment grade
- Bhave a higher probability of a rating downgrade over the medium termCorrect
- Chave a lower probability of a rating downgrade over the medium term
Explanation
A rating outlook indicates the likely direction of a rating over the intermediate term, often one to two years. A negative outlook signals a higher chance of a downgrade than a stable outlook. It does not itself change the current rating, so no immediate move to non-investment grade occurs.
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