Question

In: Finance

Why will a potential bond issuer would be willing to pay rating agencies tens of thousands...


Why will a potential bond issuer would be willing to pay rating agencies tens of thousands of dollars in order to receive a rating, especially given the possibility that the resulting rating could be less favorable than expected?

Solutions

Expert Solution

Bond issuer will be willing to pay rating agencies a higher sum of money in order to issue these Potential Bond issuer with a rating because -

A)it will offer the bond is a better chance of obtaining a higher sum of money if these rating agencies are issuing a favourable credit rating to these bonds.

B) it will also offer a higher credibility of the organisation in the entire business market because it will be helpful to generate a higher amount of loan from larger investors around the globe.

C) it will help the company in order to get regularly tracked by these credit rating agencies and it will also help these companies in order to evaluate their businesses regularly and proactively manage their business structure.

D) Even if there is an unfavourable credit rating which have been issued to this company, It will be providing the companies with reason of those unfavourable ratings and the company can adequately work upon the shortcomings in order to improve the performance of the organisation.

E) it will also help these companies to generate a higher amount of capital through other sources of debt financing because it is treated as a sign of reliable and transparent business after the bonds are rated by the credit agencies.

F) credit agencies are generally treated as independent bodies by the business organisations and market participants so so they are free from the prejudices when issuing the credit ratings to these businesses and their ratings are highly reliable.

So, it can be summarised, that even if the company is being issued with unfavourable rating on its bonds then also the company will be helping itself by getting rated by this credit rating agencies regularly, and it will be helping the organisation to proactively improve the performance and achieve the goals in the longer period by maximization of organisational value.


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