Question

In your own words write a paragraph or two about “credit rating agencies “ such as the importance of it , advantage and disadvantages , real life examples and etc ...

Answer 1

Credit Rating Agencies are agencies which rate companies or countries for credit worthiness. Companies issue debt to raise money which is needed for their expansion or start up. Government also issues bond (e.g. treasury bill) to finance the government project.

People invests in these bonds as per their risk taking propensity and also the required rate of return. Credit Rating Agencies rate the bonds depending on the credit worthiness of a company/country which can vary from AAA rated to C, D or Junk Bond.

Advantages:

Credit Rating help people understand the risk involved to invest in a particular company's bond.

Credit Rating help people to determine their required rate of return for a particular bond.

Credit rating is mandatory for all registered company under SEC.

Disadvantages:

Credit Rating can be biased towards a particular company/country.

Different credit rating agencies can rate the same company/country differently which may confuse the investors.

Credit rating can be manipulated by powerful companies or country which may give wrong signal to the investors.