Question

. Discuss the role credit rating agencies in the financial market. How useful are they?

Answer 1

Credit rating agencies play an important and significant role in the financial market. The credit rating agencies assess credit risk of specific debt securities and hence they play an important role in the financial market in general and in the bond market in particular by doing an independent evaluation with regards to creditworthiness of the debt securities. Credit rating agencies assess the debt securities of both corporations as well as governments.

The credit rating agencies are highly useful. These agencies enable the investors to depend and rely on the ratings given by them and hence investors are able to remove the constraint or disadvantage of non-availability of information to them. Banks also gain from the credit rating agencies as they are able to determine the risk premium to be charged on loans and bonds. Companies that are planning to issue a security rely on the services of credit rating agencies to rate their debt. Thus credit rating agencies are useful and on an overall basis they help in the development of financial markets.