Rating the bonds?

Question

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 in the first place; doing so is strictly voluntary. Why do you think they do it?

Answer 1

Corporations and municipalities have ratings on their bonds first, because the credit rating they get usually determines the yeild they would pay. For example a AAA bond will have a lower yield than a BBB rated bond. People who invest in bonds are generally conservative investors and wont invest in anything investment grade or below i.e. junk... so its also a sence of safety. Also for insurance coverage some bonds are backed with insurance from groups like MBIA, if a corp or a muni didn't have a rating i imagine it would be rather difficult to get them insured.

Answer 2

Rating services reduce the cost to potential buyers. Buyers would require much higher interest rates to do the investigations required. Since, it really only makes sense to do the investigation once and report it to all, rating agencies save investors substantial collective sums. Part of these savings are passed back to the borrower as lower required interest.

Answer 3

1

Answer 4

MUCH harder to find buyers for them without ratings.