Bond Rating Agencies and Stock Analysts: Who Knows What When? Both bond rating agencies and stock analysts evaluate publicly traded companies and communicate their opinions to investors. Comparing the timeliness of each, we find that Granger causality flows both ways.
Full Answer
Are the ratings assigned to bonds by the rating agencies accurate?
The ratings assigned to bonds by the major rating agencies are not perfect, but they are a good place to start. The economy moves too fast today to simply buy and hold individual investment-grade corporate bonds.
Why should investors care about corporate bond ratings?
Furthermore, investors should frequently review the ratings over the life of a bond and continue to challenge those ratings as well. The ratings assigned to bonds by the major rating agencies are not perfect, but they are a good place to start. The economy moves too fast today to simply buy and hold individual investment-grade corporate bonds.
Why do rating agencies give high credit ratings to risky securities?
Since the 2008 credit crisis, rating agencies have been criticized for not identifying all of the risks that could impact a security's creditworthiness. In particular, they were blamed for giving high credit ratings to mortgage-backed securities (MBS) that turned out to be high-risk investments.
What are the different bond credit ratings?
In general, Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, with WR and NR as withdrawn and not rated, respectively. Standard & Poor's and Fitch assign bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D, with the latter denoting a bond issuer in default. The agencies rate bonds at the time they are issued.
What is bond rating?
What Are Bond Rating Agencies? Bond rating agencies are companies that assess the creditworthiness of both debt securities and their issuers. These agencies publish the ratings used by investment professionals to determine the likelihood that the debt will be repaid.
Why are bond ratings important?
Bond ratings are important because they affect the interest rates that companies and government agencies pay on their issued bonds. The top three bond rating agencies are private firms that rate corporate and municipal bonds based on the associated degree of risk. They sell the ratings for publication in the financial press and daily newspapers.
Why are credit rating agencies criticized?
Since the 2008 credit crisis, rating agencies have been criticized for not identifying all of the risks that could impact a security's creditworthiness. In particular, they were blamed for giving high credit ratings to mortgage-backed securities ( MBS) that turned out to be high-risk investments.
Why were bond ratings criticized?
Bond rating agencies were heavily criticized early in the 21st century for assigning flawed ratings, particularly for mortgage-backed securities.
Do bond issuers pay for ratings?
Bond issuers pay the agencies for the service of providing ratings, and no one wants to pay for a low rating. Because of these and other shortcomings, ratings should not be the only factor investors rely on when assessing the risk of a particular bond investment. The bond rating agencies are private companies with their own agendas, ...
Do ETFs depend on bond ratings?
Although bond rating agencies were heavily criticized early in the 21st century, they continue to perform valuable functions for investors. A variety of exchange traded funds ( ETFs) depend on bond ratings for their purchases.