FRM Part I · FRM Exam Part I · Corporate Bonds
Which of the following best describes the difference between an issuer rating and an issue rating from a credit rating agency?
An issuer rating assesses the overall creditworthiness of the borrowing entity, whereas an issue rating reflects the features of a specific debt instrument, such as seniority and security. A subordinated bond can therefore carry a lower rating than the issuer itself.
- AAn issuer rating applies only to equity securities, while an issue rating applies only to bonds
- BAn issuer rating assesses overall creditworthiness of the entity, while an issue rating reflects a specific debt instrument's seniority and securityCorrect
- CAn issuer rating is always lower than any issue rating of the same firm
- DAn issue rating is based only on the issuer's liquidity ratios
Explanation
An issuer rating reflects the entity's general ability to meet its obligations, while an issue rating considers the specific instrument, including seniority, collateral and covenants. Hence a subordinated bond may be rated below the issuer rating. The other options misstate scope or the direction of the relationship.
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