Question-26: What do you mean by downgrade risk?

Answer:  If bond is rated low by rating agency then its called downgrading the bond and risk is referred to as downgrade risk.

Question-27: What is the role of rating agencies in case of default risk of a bond?

Answer: If you see a credit rating is a formal opinion given by a specialized company for the default risk of a bond. And these specialized companies are referred as rating agencies and provide ratings. There are three nationally recognized rating agencies in America they are Moody’s Investors Service, Standard & Poor’s Corporation, and Fitch Ratings.

Question-28: Can rating changes of a bond, once it is assigned?

Answer: Once a credit rating is assigned to a bond, the rating agency keep monitoring the credit quality of the bond issuer and can change credit rating to its bonds. That can be an “upgrade” when there is an improvement in the credit quality of a bond. Or a “downgrade” when there is a worsening in the credit quality of an issue (that is downgrade risk).

Question-29: What is “rating watch” for a bond or issue?

Answer: Usually, before an issue or bonds rating is changed, the rating agency will announce in advance that it is reviewing the issue with the potential for upgrade or downgrade. The issue or bond in such cases is called to be on “rating watch” or “credit watch.” A decision will be made within three months.  

Question-30: What is default rate and default loss rate?

Answer: Rating agencies provide information about two aspects of default risk

• Default rates: Rating agencies study and make available to investors the percentage of bonds for given rating defaulted.
• Default loss rates: A default loss rate is a measure of the magnitude of the potential of the loss should a default occur.