Explanation:
Point-in-time ratings try to evaluate a company's current situation by taking into account both cyclical and permanent effects. In contrast, through-the-cycle ratings evaluate the permanent component of default risk and are nearly independent of cyclical changes in the creditworthiness of a company.
Therefore, only a point-in-time rating approach would result in a rating downgrade for the bond.
C is incorrect. A “historical” rating methodology does not exist.
D is incorrect. Internal rating systems can be either through-the-cycle or point-in-time.
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Q.37 Assume that the economy is in the middle of a contractionary business cycle. Which of the following rating methodologies will most likely result in a rating downgrade for the company's bond rated AA at the beginning of the cycle?
A
Through-the-cycle approach.
B
Point-in-time approach.
C
Historical approach.
D
Internal rating approach.