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CS Professional · Strategic Management and Corporate Finance · Role of Intermediaries in Fund Raising

A credit rating agency assigns 'AA+' to the proposed NCDs of Tarang Power Ltd. Which of the following best describes what this rating conveys?

A credit rating is the agency's opinion on how capable the issuer is of paying interest and principal on time. It is neither a guarantee of repayment nor a buy, hold or sell recommendation, and it does not certify legal compliance.

  1. AAn opinion on the issuer's capacity to service the debt on time, not a recommendation to buy, hold or sellCorrect
  2. BA guarantee by the agency that the debentures will be repaid
  3. CA recommendation that investors should buy the debentures
  4. DA certification of the issuer's compliance with the Companies Act

Explanation

A credit rating is an opinion about the relative likelihood of timely payment of interest and principal. It is not a guarantee, not investment advice and not a statutory compliance certificate. Treating it as a buy recommendation is the common error.

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