If a company has a high credit rating, what does this imply about default risk?

If a company has a high credit rating, what does this imply about default risk?

• A. Lower default risk
• B. Higher default risk
• C. No default risk
• D. It is not related

Answer: (A)

A high credit rating signals that a company is viewed as more creditworthy and better able to meet its debt obligations. Default risk is the chance that the borrower will fail to repay what is owed. When the rating is high, the assessed probability of default is lower, so default risk is reduced. Of course, no rating guarantees repayment, but the higher the rating, the lower the expected risk. The other statements don’t fit because a high rating does not imply higher or zero default risk, and it is indeed related to assessing how likely a default is.

A high credit rating signals that a company is viewed as more creditworthy and better able to meet its debt obligations. Default risk is the chance that the borrower will fail to repay what is owed. When the rating is high, the assessed probability of default is lower, so default risk is reduced. Of course, no rating guarantees repayment, but the higher the rating, the lower the expected risk. The other statements don’t fit because a high rating does not imply higher or zero default risk, and it is indeed related to assessing how likely a default is.