Question

What are the two main reasons for having bond agencies rate bonds?

Answer 1

The Bond-rating agency assesses the default risk. There 2 main reasons for doing so are,

1) The agency is able to provide accurate and reliable information to potential investors. For doing this, they charge a nominal fee. It helps investors to get resources of thousands of potential bond issue which would otherwise take a lot of time and effort to analyze their creditworthiness.

2) From the bond issuer's perspective, they try to send a signal that their bond is reliable and the firm is able to meet the financial obligations of the bond issue. Accurate information and a low level of uncertainty in the market can raise the price of a bond.

Hence rating agencies help market the bond.