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

A risk analyst compares a bank's internal rating system with an external agency's rating approach. Which statement best describes a typical difference between a through-the-cycle (TTC) rating and a point-in-time (PIT) rating?

A through-the-cycle rating looks at a borrower's creditworthiness across the whole business cycle, including stress, so it changes less often. A point-in-time rating reflects current conditions and migrates more. The option that reverses these roles is incorrect.

  1. ATTC ratings respond quickly to changes in current economic conditions, while PIT ratings are stable across the business cycle
  2. BTTC ratings focus on the borrower's position under stress conditions across the cycle and so migrate less over time than PIT ratingsCorrect
  3. CTTC ratings are used only for sovereign borrowers, while PIT ratings are used only for corporate borrowers
  4. DTTC ratings are derived solely from equity market prices, while PIT ratings use only financial statements

Explanation

TTC ratings, typical of external agencies, aim to assess credit quality over a full cycle, ignoring transitory fluctuations, so they are more stable and migrate less. PIT ratings reflect current conditions and are more volatile. The first option reverses the two definitions.

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