Bond Rating Agencies, Essay Example

A bond can be referred to as a debt instrument that is usually issued within a period of one year with the absolute purpose or raising capital through borrowing. The bond ratings have actually been considered the main source of the investor information concerning marketability and quality of the bonds that are issued. Therefore, they have indeed been subjected to a substantial investigation in the recent years. Both the credit rating is an apparatus that is used in the assessment of the ability of the issuer in meeting the debt obligation. The bond rating is indeed independent assessment that is associated with the purchase and subsequent holding of the particular bond. Moreover, it helps in the assessment of the relative risk of the credit and the ratings indicate the probability the commitment will actually be repaid.

In the recent years the bond rating agencies have increasingly been under scrutiny due to their obvious failures to ensure accuracy in the prediction and warning of investors of the impending financial difficulties related to the organizations such as the Penn-Central bankruptcy among others. Moreover, the bond rating agencies have actually become conspicuous by the systematic downgrading of the securities of various firms as a result of the deterioration in the operating and financial conditions of the firm. A firm would want to maintain a high bond rating since it will attract several investors who are expecting a higher reward. For example, a high bond rating which is often depicted by AAA simply depicts a low credit risk to the investor and therefore attractive. The key advantage of equity financing is the fact that it does not have to be paid back as opposed to debt financing. Moreover, the liabilities and risk are also shared with the new investor in the case of equity financing.