It has been said that agency ratings indicate relative levels of risk instead of absolute levels. Which of the following statements explains this position?
A) Bonds are reclassified as economic conditions change.
B) The probability of default does not change as economic conditions change.
C) One would expect that yield spreads between classes of bonds would not adjust during times of economic change.
D) Bond ratings do not change with economic conditions, but the probability of default changes across rating classes does.

Question

It has been said that agency ratings indicate relative levels of risk instead of absolute levels.  Which of the following statements explains this position?
A) Bonds are reclassified as economic conditions change.
B) The probability of default does not change as economic conditions change.
C) One would expect that yield spreads between classes of bonds would not adjust during times of economic change.
D) Bond ratings do not change with economic conditions, but the probability of default changes across rating classes does.

Quizplus · Accepted Answer

The position is that bond ratings do not change with economic conditions, but the probability of default changes across rating classes.

It Has Been Said That Agency Ratings Indicate Relative Levels