Author Question: A higher bond rating usually means a lower yield. Indicate whether the statement is true or ... (Read 82 times)

penguins · **on:** Jul 10, 2018

A higher bond rating usually means a lower yield.

Indicate whether the statement is true or false.

Question 2

What type of risk is being rated when bond agencies assign ratings to outstanding debt? What are the two main reasons for having bond agencies rate bonds?

What will be an ideal response?

akpaschal · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: TRUE

Answer to Question 2

Answer: Bond rating agencies assess default risk. Bonds are rated by agencies for two primary reasons. First, the agencies are able to provide reliable information to potential investors at a reasonable cost. Without this service, investors would have to develop the resources and expertise to properly access the creditworthiness of thousands of potential bond issuers. Second, from the bond issuer's perspective, issuers of bonds are seeking to send a reliable signal to the market about the firm's ability to meet the financial obligations of the bond issue. Accurate information and a reduction in uncertainty in the marketplace can help raise the price of a bond. Thus, rating agencies, in effect, help market the bond.