Question

Which of the following statements about debt ratings is most correct?

A	The ratings reflect the probability of default.

B	The ratings on outstanding debt are automatically reviewed and updated annually.

C	The ratings are important to investors, but unimportant to issuers.

D	The ratings are based solely on a quantitative analysis of the issuer’s financial condition.

E	The ratings run from A (for the best) to F (for the worst).

Answer 1

Option A is correct.

Debt ratings reflect the probability of default and the issuer's ability to make the bond's payments on time. The ratings are important to investors as it helps them understand the risk involves and also important to the issuers as it helps them enter the market at preferable interest rates and make a good name of 'timely payment of debt' for themselves. The bond ratings are based on future outlook of the company and they are based on not only quantitative factors but qualitative factors as well. Moody's and Fitch are two credit rating agencies and their ratings range are as follows -

Moody's - Aaa (best) to baa3 (worst) for higher rated bonds, Baa1 to C for non-investment grade bonds

Fitch - AAA (best) to BBB- (worst) for higher rated bonds, BB+ to D for non-investment grade bonds