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FRM Part I · FRM Exam Part I · External and Internal Credit Ratings

A credit analyst reviews the rating process used by major agencies. Which statement best describes the difference between a through-the-cycle (TTC) rating and a point-in-time (PIT) rating?

A through-the-cycle rating evaluates default risk across a full business cycle and is therefore relatively stable, while a point-in-time rating reflects current conditions and changes more with the cycle. Agency ratings are generally TTC; internal models are often PIT.

  1. ATTC ratings respond quickly to current conditions, whereas PIT ratings are designed to stay stable across the business cycle
  2. BTTC ratings assess default risk over a full cycle and are stable, whereas PIT ratings reflect current conditions and fluctuate moreCorrect
  3. CTTC ratings are used only for sovereigns, whereas PIT ratings are used only for corporates
  4. DTTC ratings measure loss given default, whereas PIT ratings measure the probability of default

Explanation

Agency ratings are generally TTC: they look past temporary cyclical swings and so migrate less often. PIT ratings, typical of internal models using current market data, move with the cycle. The first option reverses the two definitions.

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