Question

Bond-rating agencies have invested significant sums of money in an effort to determine which quantitative and non-quantitative factors best predict bond defaults. Furthermore, some of the raters invest time and money to meet privately with corporate personnel to get information used in assigning the issuer's bond ratings. To recoup those costs, some bond rating agencies have tied their ratings to the purchase of additional services. Do you believe this is an acceptable practice? Explain.

Answer 1

No, I do not believe that this is an acceptable practice because these are related to issuance of the ratings which are not completely independent in the nature and they are highly dependent and influence by the buyers of these rating agencies because they are dependent upon the compensation which are made by the corporate entities.

Hence, this is endangering the overall independence of the bond agencies in respect to issuance of various ratings to corporates because they also have to run their own business in a profitable manner as Bond rating agencies are also financial entities who wants to maximize their profits and they operates for maximizing the rate of return so these Bond rating agencies will be trying to manage their additional compensation by providing additional services but it some where conflict with the independence of this bond agencies and I do not agree with such practice because it endangers overall sanctity of the bond rating.