Skip to content

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

A risk analyst observes the following one-year transition data for a through-the-cycle agency rating grade, Baa, in two years. In an expansion year, 2% of Baa issuers were downgraded and 6% upgraded. In a recession year, 3% were downgraded and 4% upgraded. A comparable PIT internal grade showed 1% downgraded and 15% upgraded in the expansion, and 25% downgraded and 2% upgraded in the recession. Which conclusion is best supported?

The internal grade is more cyclical. Its downgrade rate jumps from 1% to 25% and upgrades fall from 15% to 2% between expansion and recession, while the agency grade moves only from 2% to 3% downgrades. Large swings in migration indicate point-in-time behaviour; small swings indicate through-the-cycle.

  1. AThe agency grade is more cyclical because its downgrade rate changed by only 1 percentage point
  2. BThe internal grade is more cyclical, as its migration rates swing far more between the expansion and the recessionCorrect
  3. CBoth grades are equally cyclical because each shows more upgrades in expansions
  4. DThe agency grade is a PIT grade because its upgrade rate is higher in expansions

Explanation

The agency downgrade rate moves from 2% to 3% (1 point) and upgrades from 6% to 4%, a small shift. The internal grade's downgrades move from 1% to 25% (24 points) and upgrades from 15% to 2%. Large swings indicate PIT behaviour, so the internal grade is more cyclical. The first option reverses the logic: small changes indicate TTC.

Did you get it right without looking?

One question tells you little. A timed set on External and Internal Credit Ratings shows your real accuracy, how long you take and where you lose marks.

Practise External and Internal Credit RatingsFree diagnostic mock

More External and Internal Credit Ratings questions