easy · FRM Part 1 Financial Markets and Products
What is the relationship between an obligor's probability of default (PD) and the credit rating assigned by an agency?
- There is no direct relationship between ratings and PD as ratings only measure recovery.
- Higher ratings (e.g., AAA) correspond to lower PD values.
- Higher ratings correspond to higher PD values due to increased leverage.
- Ratings and PD are perfectly correlated in a linear fashion.
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