A bond rating is an essential factor for fixed income investors. The rating provides the investor with an opportunity to access the risk of the investment. The risk measurement involves the analysis of the financial condition of the bond issuer. In this case, bond ratings for the purchase of additional services is not an acceptable practice since the evaluations occur during the time of issue. The process involves revaluation by the bond and the issuer to ensure that the rating variance is warranted. The ratings are critical not only in their role to inform investors but also they are crucial to other organizations and the government payments of their bonds because of their significant effect on the interest rates.
Bond agencies incur a very high cost when rating these bonds; therefore, the agencies need some benefits for them to analyze the bonds and maximize their profits. Hence, credit rating is an impartial process which should not have any links to the organization. Credit analyst provides a different approach for evaluating company worthiness. It offers an excellent opportunity to analyze whether the bonds falls to the investment grade or the non-investment grade.
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The ratings also have a significant effect on bonds marketability in secondary markets, the potential for the firm to borrow from another market as well as the capacity of the organization to issue common stock. Hence, in my point of view it in unethical exercise for both the bond agencies and the company to involve in bond rating activities. However, to recoup some of their investment, bond agencies tie their rating in the purchase of more services attached to the company which is an unacceptable practice.
