Explanation:
A ratings transition matrix reports historical one-year migration frequencies for issuers or bonds that began the year in a given rating. In this case, the Baa row shows that 7.0% of bonds starting the year rated Baa migrated to Ba during the year. Choice B is incorrect because "expected over the next year" is forward-looking forecasting language, whereas the matrix summarizes what happened historically over the past year. Choice C is incorrect because an upgrade from Baa would be to A, Aa, or Aaa (higher ratings), not to below-investment-grade categories. Choice D is incorrect because it misreads the direction of the table entries: the 0.1% figure shown is for Baa → Aaa, not Aaa → Baa.
(Book 4, Module 50.2, LO 50.h)
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A one-year historical ratings transition matrix provides the following data for bonds that started the year rated Baa:
| Rating From: | Aaa | Aa | A | Baa | Ba | B | Caa-C | Default |
|---|---|---|---|---|---|---|---|---|
| Baa | 0.1% | 0.3% | 6.0% | 83.0% | 7.0% | 3.0% | 0.2% | 0.4% |
The most accurate interpretation is that:
A
7.0% of bonds rated Baa at the start of the year were downgraded to Ba over the year.
B
0.4% of bonds rated Baa at the start of the year are expected to default over the next year.
C
6.4% of bonds rated Baa at the start of the year were upgraded to below-investment-grade ratings over the year.
D
0.1% of bonds rated Aaa at the start of the year were downgraded to Baa over the year.
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