FRM Part II · FRM Exam Part II · Credit Scoring and Rating
A risk analyst compares two ways of assigning credit ratings to corporate bonds. Rating Agency A states that its ratings are meant to reflect a borrower's creditworthiness over a full economic cycle and are changed only when the agency believes a credit's long-term risk profile has changed. Which description best fits this approach?
The approach is through-the-cycle rating. It assesses creditworthiness over a whole economic cycle and changes ratings only when the long-term risk profile shifts, which makes ratings stable. Point-in-time ratings, by contrast, respond to current conditions and migrate more often.
- AThrough-the-cycle rating philosophyCorrect
- BPoint-in-time rating philosophy
- CMarket-implied rating philosophy
- DStructural-model rating philosophy
Explanation
A through-the-cycle approach looks past temporary swings in the economy and rates on the borrower's long-run, stressed-cycle risk profile, giving stable ratings. A point-in-time approach would instead use current conditions and change frequently. Market-implied and structural approaches rely on market prices or asset values, not a stated long-cycle view.
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