Which statement best describes how advisers should use credit ratings?

• A. Ratings guarantee default risk
• B. Rating assesses creditworthiness and helps estimate default risk; not guaranteed; consider transitions and issuer fundamentals
• C. Ratings are the sole determinant of investment decisions
• D. Ratings are irrelevant for advisers

Answer: (B)

Credit ratings are opinions about a borrower’s ability to meet its obligations and they help gauge creditworthiness and estimate default risk. They are a useful input because they summarize market-facing views and historical experience, but they are not guarantees; a rating can change, and even highly rated issuers can default. Advisers should use ratings as one part of the assessment, while also considering how ratings may transition (upgrades or downgrades) and the issuer’s fundamentals—such as debt levels, cash flow, liquidity, and the business outlook. By combining rating signals with independent analysis of the issuer and scenario planning, you get a more robust view of credit risk than you would from ratings alone.