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FRM Part II · FRM Exam Part II · Credit Scoring and Rating

An analyst reviews an agency's rating process for a corporate issuer. Which element is generally part of agency methodology that combines quantitative and qualitative inputs?

Agency methodology combines quantitative analysis, such as leverage and coverage ratios, with qualitative judgment about management quality, industry position and business risk. A rating committee then reaches the final rating. It does not rely solely on equity volatility, firm size or the sovereign rating.

  1. AAnalysis of financial ratios together with judgment on management quality, industry position and business riskCorrect
  2. BExclusive use of the issuer's equity price volatility to derive the rating
  3. CAssigning the rating solely by the issuer's size without reference to leverage
  4. DSetting the rating equal to the issuer's sovereign rating in all cases

Explanation

Agency ratings blend financial analysis (leverage, coverage, cash flow) with qualitative assessment of business profile, management and industry risk, then a committee decides. The other options describe single-factor approaches, not agency practice. Equity-volatility models are structural models used by market-based approaches rather than agencies.

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