MULTIPLE-CHOICE QUESTIONS WITH ANSWERS ON CREDIT RATING OF BONDS: RISK ASSESSMENT AND FACTORS CONSIDERED IN ASSIGNING CREDIT RATING

1. What is the primary purpose of credit ratings for bonds?

A. To determine the bond’s interest rate
B. To assess the risk of default
C. To set the bond’s maturity date
D. To identify the bond’s issuer

Answer: B. To assess the risk of default
2. Which organization is responsible for regulating credit rating agencies in India?

A. RBI
B. SEBI
C. IRDAI
D. NABARD

Answer: B. SEBI
3. Which of the following is a major credit rating agency in India?

A. Moody’s
B. S&P Global Ratings
C. CRISIL
D. Fitch Ratings

Answer: C. CRISIL
4. What does a credit rating of ‘AAA’ signify?

A. High risk of default
B. Moderate risk of default
C. Low risk of default
D. No risk of default

Answer: C. Low risk of default
5. Which factor is NOT considered when assigning a credit rating to a bond?

A. Issuer’s creditworthiness
B. Current market conditions
C. Bond’s coupon rate
D. Issuer’s financial health

Answer: C. Bond’s coupon rate
6. What does the ‘C’ rating typically indicate?

A. Investment grade
B. High yield
C. Speculative grade
D. Default

Answer: C. Speculative grade
7. How does the credit rating affect the bond’s interest rate?

A. Higher ratings lead to higher interest rates
B. Lower ratings lead to lower interest rates
C. Higher ratings lead to lower interest rates
D. There is no effect

Answer: C. Higher ratings lead to lower interest rates
8. Which of the following is a qualitative factor considered in credit rating?

A. Earnings before interest and taxes (EBIT)
B. Debt-to-equity ratio
C. Management quality
D. Interest coverage ratio

Answer: C. Management quality
9. What is the impact of a downgrade in a bond’s credit rating?

A. Increase in bond’s market price
B. Decrease in bond’s market price
C. No impact on bond’s market price
D. Immediate repayment requirement

Answer: B. Decrease in bond’s market price
10. Which agency is a global credit rating agency operating in India?

A. ICRA
B. Fitch Ratings
C. CARE Ratings
D. ONICRA

Answer: B. Fitch Ratings
11. What does the acronym CRISIL stand for?

A. Credit Rating Information Services of India Limited
B. Credit Regulatory Investment Services of India Limited
C. Credit Risk Information Services of India Limited
D. Credit Reporting Investment Services of India Limited

Answer: A. Credit Rating Information Services of India Limited
12. Which of the following is considered a financial risk factor in credit rating?

A. Market competition
B. Debt service coverage ratio
C. Regulatory environment
D. Technological advancements

Answer: B. Debt service coverage ratio
13. What does a credit rating of ‘BBB’ generally signify?

A. High credit risk
B. Substantial credit risk
C. Moderate credit risk
D. Low credit risk

Answer: C. Moderate credit risk
14. Which aspect is primarily assessed in a bond’s credit rating?

A. Liquidity of the issuer
B. Growth potential of the issuer
C. Repayment capacity of the issuer
D. Profitability of the issuer

Answer: C. Repayment capacity of the issuer
15. How often are credit ratings typically reviewed by rating agencies?

A. Annually
B. Biannually
C. Quarterly
D. Monthly

Answer: A. Annually
16. What is the consequence of a bond being rated below investment grade?

A. Increased investment appeal
B. Decreased investment appeal
C. Unchanged investment appeal
D. Automatic buy recommendation

Answer: B. Decreased investment appeal
17. Which rating indicates the highest level of credit risk?

A. BB
B. CCC
C. A
D. AA

Answer: B. CCC
18. What type of bonds are rated by credit rating agencies?

A. Corporate bonds
B. Government bonds
C. Municipal bonds
D. All of the above

Answer: D. All of the above
19. Which of the following is a quantitative factor in credit rating?

A. Management integrity
B. Industry competition
C. Revenue growth
D. Strategic planning

Answer: C. Revenue growth
20. Which factor is considered in the macroeconomic analysis for credit rating?

A. Company’s market share
B. Country’s GDP growth
C. Issuer’s innovation capacity
D. Competitors’ financial health

Answer: B. Country’s GDP growth
21. What is a ‘junk bond’?

A. A bond with low interest
B. A bond with high credit rating
C. A bond rated below investment grade
D. A bond with no maturity date

Answer: C. A bond rated below investment grade
22. Which credit rating indicates a speculative investment?

A. AAA
B. BBB
C. BB
D. AA

Answer: C. BB
23. What is the primary role of SEBI in credit ratings?

A. Issuing ratings
B. Regulating rating agencies
C. Investing in bonds
D. Setting bond prices

Answer: B. Regulating rating agencies
24. Which of the following is a microeconomic factor considered in credit rating?

A. Inflation rate
B. Company’s debt levels
C. Interest rates
D. Unemployment rate

Answer: B. Company’s debt levels
25. What does the rating symbol ‘D’ signify in bond credit rating?

A. High credit quality
B. Low credit quality
C. Default
D. Investment grade

Answer: C. Default
26. Which of these is a key element in assessing operational risk?

A. Market trends
B. Financial statements
C. Production efficiency
D. Economic policies

Answer: C. Production efficiency
27. Which credit rating is typically considered the cut-off for investment grade?

A. BBB-
B. BB+
C. B+
D. A-

Answer: A. BBB-
28. What is the significance of a ‘credit watch’?

A. Indicates a potential upgrade
B. Indicates a potential downgrade
C. Indicates stable rating
D. Indicates no change in rating

Answer: B. Indicates a potential downgrade
29. Which of the following factors is NOT typically considered in environmental, social, and governance (ESG) assessment in credit rating?

A. Environmental impact
B. Social responsibility
C. Governance practices
D. Marketing strategy

Answer: D. Marketing strategy
30. Which credit rating agency operates as a subsidiary of Moody’s?

A. CARE Ratings
B. CRISIL
C. ICRA
D. ONICRA

Answer: C. ICRA
31. What does the ‘rating outlook’ indicate?

A. Current rating status
B. Potential future rating direction
C. Issuer’s creditworthiness
D. Interest rate trends

Answer: B. Potential future rating direction
32. How does high inflation impact bond credit ratings?

A. Positively
B. Negatively
C. No impact
D. Depends on the bond type

Answer: B. Negatively
33. What is the primary concern of credit rating agencies when assessing bonds?

A. Bond’s market performance
B. Bond’s liquidity
C. Issuer’s ability to meet debt obligations
D. Issuer’s growth potential

Answer: C. Issuer’s ability to meet debt obligations
34. Which of the following best describes a ‘structured finance’ product?

A. Equity shares
B. Corporate bonds
C. Mortgage-backed securities
D. Government bonds

Answer: C. Mortgage-backed securities
35. Which factor is considered in the issuer’s qualitative analysis?

A. Profit margins
B. Brand strength
C. Earnings per share
D. Asset turnover ratio

Answer: B. Brand strength
36. What does an ‘investment grade’ rating imply about a bond?

A. High risk
B. Medium risk
C. Low risk
D. No risk

Answer: C. Low risk
37. Which of the following agencies is NOT involved in credit rating in India?

A. CRISIL
B. CARE Ratings
C. ICRA
D. NASDAQ

Answer: D. NASDAQ
38. What is the primary use of a bond’s credit rating by investors?

A. Determine tax liabilities
B. Assess repayment risk
C. Calculate bond’s duration
D. Estimate bond’s market value

Answer: B. Assess repayment risk
39. How does a strong regulatory environment affect credit ratings?

A. Negatively
B. Positively
C. No impact
D. Varied impact

Answer: B. Positively
40. Which component is evaluated under financial risk in credit rating?

A. Corporate governance
B. Revenue stability
C. Technological advancements
D. Market competition

Answer: B. Revenue stability
41. What role do credit rating agencies play in the bond market?

A. Setting interest rates
B. Providing investment advice
C. Assessing credit risk
D. Issuing bonds

Answer: C. Assessing credit risk
42. What is the typical effect of an upgrade in a bond’s credit rating?

A. Lower bond prices
B. Higher bond yields
C. Lower bond yields
D. Increased interest payments

Answer: C. Lower bond yields
43. Which rating indicates the lowest level of risk?

A. AA
B. A
C. BBB
D. AAA

Answer: D. AAA
44. What does ‘sovereign rating’ refer to?

A. Rating of corporate bonds
B. Rating of municipal bonds
C. Rating of government bonds
D. Rating of international bonds

Answer: C. Rating of government bonds
45. Which factor does NOT influence the credit rating of a bond?

A. Credit history of the issuer
B. Economic environment
C. Stock price of the issuer
D. Financial performance

Answer: C. Stock price of the issuer
46. Which rating indicates a bond is speculative and subject to high credit risk?

A. A
B. AA
C. BB
D. AAA

Answer: C. BB
47. What is the effect of political instability on bond credit ratings?

A. Positive impact
B. Negative impact
C. No impact
D. Only affects sovereign ratings

Answer: B. Negative impact
48. Which credit rating agency is known for providing financial market intelligence?

A. S&P Global Ratings
B. CRISIL
C. ICRA
D. Fitch Ratings

Answer: A. S&P Global Ratings
49. How does the business cycle influence credit ratings?

A. Positively in downturns
B. Negatively in upturns
C. Positively in upturns
D. No influence

Answer: C. Positively in upturns
50. What does the term ‘default risk’ refer to in credit ratings?

A. Risk of early bond redemption
B. Risk of bond price fluctuation
C. Risk of issuer failing to pay
D. Risk of bond rating upgrade

Answer: C. Risk of issuer failing to pay