MSP430 + IAR Simulator

You probably did not load the memory of the simulator. It assumes the they are all 0's -- including the Reset Vector. These the simulator tried to execute the instruction at address 0x0 and found 0x0 there too and 0x0 is an illegal opcode.

What do you want the simulator to simulate? A blank device with 0's in its memory? In that case, it did a nice simulation.

I wanted to test the RTC settings. Here is a simple code. When debugging, the same error occurs.

#include "io430.h"
int main( void )
{
WDTCTL = WDTPW + WDTHOLD;
P4OUT |= BIT7;
P4DIR |= BIT7;
while(1)
{
}

}

I do not know how you intend to "test the RTC settings" and your simple code has nothing to do with that.

Your code should compile with no error. And you should be able to download it to the simulator. The simulator does have WDTCTL, P4OUT, and P$DIR registers and you will see their contents change when you single step through the code. But beside that, nothing else will happen.