Bond investments have become much more prominent as many major pension plans have begun to invest more in bonds and less in the volatile stock market. Bond rating companies play a critical role in this process. What is their role? Who are the major rating companies? Some analysts say these companies played a major role in the financial crisis of 2008. Explain why and discuss some of the possible changes that might help avoid the problem in the future
Bond rating companies: What is their role?
Bond ratings are set by the "big three" credit rating agencies who set the ratings for bonds and other corporate debt. Their role is to analyze each credit facility (loan or bond issue) in light of the financial circumstances of the borrowing firm (ability to generate profits, cash and funds for repayment) and the loan features (whether supported by assets and/or insurance to guarantee repayment). So, a firm can have different ratings for different loans, depending on whether that loan was supported by repayment insurance and collateral and where in the "pecking order" (subordination to other loans) the loan was when issued. The three agencies are an oligopoly and competitors are not allowed into their role. While they are independent of each other, their ...
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