Financial Risk Manager Part 1
Get started today
Ultimate access to all questions.
Comments
Loading comments...
Ultimate access to all questions.
A risk analyst at a fixed-income investment firm has acquired a rating transition matrix issued by a rating agency to use in estimating credit risks in the firm's bond portfolio. The analyst plans to use it to forecast rating changes in the upcoming year (Year 1) and the following year (Year 2). Which of the following would the analyst be correct to note when using the rating transition matrix in estimating credit risk?
A
An investment-grade bond is less likely to have its rating remain unchanged over the course of Year 1 than a speculative-grade bond.
B
A bond that is upgraded in Year 1 would be more likely to be upgraded in Year 2 than is indicated by the corresponding probability in the transition matrix.
C
Since external ratings are through-the-cycle, probabilities predicted for Year 2 using the matrix should remain accurate if the economic forecast for the year is revised significantly downward.
D
An assumption that rating changes in consecutive years are independent events produces the most realistic estimates of multi-year rating transitions.