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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)

A PMS distributor explains credit ratings to a client. Which of the following is a feature of a bond rated AAA by a SEBI-registered credit rating agency?

A AAA rating indicates the highest degree of safety regarding timely payment of interest and principal. It reflects low credit risk only; the bond's market price can still fall if interest rates rise, and the rating is not limited to government issuers.

  1. AIt indicates the highest degree of safety regarding timely payment of interest and principalCorrect
  2. BIt guarantees the bond cannot lose market value
  3. CIt indicates the issuer is a government entity
  4. DIt indicates the bond is in default

Explanation

AAA denotes the highest safety regarding timely servicing of financial obligations. It does not remove interest rate risk, so prices can still fall. It is not restricted to government issuers, and it is not a default rating.

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