Question

8.         Bond Ratings [LO3] Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated; doing so is strictly voluntary. Why do you think they do it?

Answer 1

Yes, it is true that companies are not compulsorily required to have their bonds rated but practically we see that companies try to go for their bonds get rated through various rating agencies inspite of costs of rating of bonds because rating of bonds indirectly gives followings benefits;

1. With the help of rated bonds, companies can easily raise funds from market.

2. Investors can easily pay more for high rated bonds in compare to low rated bonds hence rating of bonds give some benefits for the companies.

3. Rating agency give rating on the basis of past record of the company and other financial records. Thus investors feel theirself much secured in compare to other debt securities.

4. High rated bonds result into low flotation costs in compare to other financial securities.

5. Rating of bonds have become a trend in the modern market that is why most of the companies have to follow such trend, that is why rating of bonds become a vital issue.

6. In case of recession in the market, companies can rasie funds only with the help of highly rated securities. So it looks that rating play a major role in today financial market etc.