Question

Which of the following is NOT an action or consequence of the activities of bond rating agencies?

	a.	While it is the mandate of the agency to report on the creditworthiness of securities held by bondholders, their findings are also relevant to the firm’s shareholders.
	b.	In assessing the rating, the agency examines financial ratios, contract terms (restrictive covenants), and important qualitative factors.
	c.	With respect to qualitative factors, the agency will pay particular attention to ratios, measuring return on assets, interest coverage, and operating profit margins.
	d.	When a material change is identified in any of the factors used to measure a bond’s default risk, the agency will immediately announce a change in the rating.

please explain for a rating

Answer 1

The answer is option “c” - With respect to qualitative factors, the agency will pay particular attention to ratios, measuring return on assets, interest coverage, and operating profit margins.

Explanation: Here ratios like ROA, profit margins etc. are financial ratios and are a part of quantitative factors that are considered by a rating agency.

The qualitative factors that are considered are growth of the industry, concentration in the industry, barriers to entry, etc.

Other qualitative factors are management quality, scope of new product development, scope for innovation, risk control measures in place etc.