THE RATING AGENCIES HAVE ANALYZED THE CREDITWORTHINESS OF COMPANY...

19.

The rating agencies have analyzed the creditworthiness of Company XYZ and have determined that the

company currently has adequate payment capacity, although a negative change in the business environment

could affect its capacity for repayment. The company has been given an investment grade rating by S&P and

Moody’s. Which of the following S&P/Moody’s ratings has Company XYZ been assigned?

a.

AA/Aa

b.

A/A

c.

BBB/Baa

d.

BB/Ba

Correct Answer: c

Rationale:

The interpretation given by the above statement refers to a rating of BBB/Baa, which is a lower invest-

ment grade rating. A rating of BB/Ba is not investment grade, an AA/Aa rating is a very high investment grade

rating and an A/A rating still reflects a strong capacity to make payments.

Section:

Financial Markets and Products

Reference:

John Caouette, Edward Altman, Paul Narayanan and Robert Nimmo, Managing Credit Risk, 2nd Edition,

Chapter 6, “The Rating Agencies.”

Learning Objectives:

Describe Standard and Poor’s and Moody’s rating scales and distinguish between investment

and noninvestment grade ratings. Describe a rating scale, define credit outlooks, and explain the difference

between solicited and unsolicited ratings.