bond rating agencies have invested significant sums of money in an effort to det
ID: 2683093 • Letter: B
Question
bond rating agencies have invested significant sums of money in an effort to determine which quantitative and non-quantitative factors best predict bond default. Furthermore, some of the raters invest time and money to meet privately with corporate personnel to get nonpublic informatin that is used in ssigning the issue's bond rating. To recoup these costs, some bond rating agencies have tied their ratings to the purchase of additional services. Do you believe that this is an acceptable practice? Defend your position.Explanation / Answer
A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. The value of such security ratings has been widely questioned after the 2007-09 financial crisis. In 2003, the U.S. Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.[1] More recently, ratings downgrades during the European sovereign debt crisis of 2010-11 have drawn criticism from the EU and individual countries.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.