Which of the following describes rating transition matrices published by credit rating firms:

Which of the following describes rating transition matrices published by credit rating firms:
A . Expected ex-ante frequencies of migration from one credit rating to another over a one year period
B . Probabilities of default for each credit rating class
C . Probabilities of ratings transition from one rating to another for a given set of issuers
D . Realized frequencies of migration from one credit rating to another over a one year period

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Answer: D

Explanation:

Transition matrices are used for building distributions of the value of credit portfolios, and are the realized frequencies of migration from one credit rating to another over a period, generally one year.

Therefore Choice ‘d’ is the correct answer.

Since they represent an actually observed set of values, they are not probabilities nor are they forward looking ex-ante estimates, though they are often used as proxies for probabilities. Choice ‘a’ and Choice ‘c’ are not correct. They include more than information on just defaults, therefore Choice ‘b’ is not correct.