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Answer: Rating agencies only produce ratings for companies whose debt instruments are publicly traded.
**Correct Answer: A** **Explanation:** A is correct because rating agencies primarily rate only publicly traded bonds and money market instruments. This creates a significant limitation for banks that need to assess credit risk for private companies or non-publicly traded debt instruments, making it important for banks to develop their own internal rating systems. B is incorrect because agency ratings are reviewed periodically (usually at least every 12 months), not just when specific events occur. C is incorrect because the fees for agency ratings are typically paid by the firms being rated, not by financial institutions using the ratings. D is incorrect because rating agencies' analyses are comprehensive and incorporate multiple factors including historical and projected financial information, industry/economic data, peer comparisons, planned financing details, and qualitative factors such as governance frameworks and management meetings.
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A risk manager at a midsize bank is assessing the bank's methods for measuring the credit risk exposure of its loan portfolio. The manager notes the advantages and disadvantages of ratings produced by rating agencies. Which of the following conclusions should the manager make about a limitation of using agency ratings to assess credit risk?
A
Rating agencies only produce ratings for companies whose debt instruments are publicly traded.
B
Agency ratings are only reassessed when a company issues new debt or experiences a major credit-related event.
C
Financial institutions must pay fees for the rating services provided by rating agencies but these services are less affordable for smaller firms given their lower revenues.
D
Agency ratings of companies tend to be based on a narrow analysis limited to historical and forecasted financial information.