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Impact of Time Horizon and Economic Cycle

  • The chances of default given any rating at the beginning of a cycle increases with the time horizon
  • External ratings are designed to be relatively stable over the business cycle. There is a possibility that there are errors in severe cycles
  • But external ratings have fairly good records in indicating relative defaults rates

Impact on Rating Changes on Bond and Stock Prices

  • A rating downgrade is likely to decrease the price of the bond
  • A rating upgrade is likely to increase the price of the bond
  • A rating downgrade is likely to decrease the price of the stock
  • A rating upgrade is somewhat likely to increase the price of the stock





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