Explanation:
Under Standard & Poor's (S&P) credit rating system:
Therefore, a downgrade from A to BBB means the company still has adequate capacity, but is now more vulnerable to negative economic changes (Option D).
Option C is incorrect because 'extremely strong' corresponds to AAA and 'very strong' corresponds to AA. Options A and B reflect potential market reactions or equity forecasts, not the direct definition and interpretation of a credit rating downgrade.
Ultimate access to all questions.
Q.34 An intern in a risk management department of a bank is struggling with the understanding of the nature of credit ratings provided by the rating agencies. He overhears a discussion from some of his colleagues regarding the recent downgrade of company XYZ by S&P from A to BBB. What is the interpretation of XYZ’s credit rating downgrade from A to BBB?
A
Bonds issued by XYZ are currently overvalued in the market
B
Stocks of XYZ are expected to underperform the market benchmark in the nearest future
C
XYZ’s capacity to meet its obligations slightly deteriorated from ‘extremely strong’ to ‘very strong’
D
XYZ still has an adequate capacity to meet its obligations, but now it is more susceptible to a negative change in the business environment
No comments yet.