Bond rating agencies have invested significant sums of money in an effort to det
ID: 2777679 • Letter: B
Question
Bond rating agencies have invested significant sums of money in an effort to determine which quantitative and non-quantitative factors best predict bond defaults. Furthermore, some of the raters invest time and money to meet privately with corporate personnel to get nonpublic information that is used in assigning the issue’s bond rating. To recoup those costs, some bond rating agencies have tied their ratings to the purchase of additional services. Do you believe that this is an acceptable practice? Defend your position.
Explanation / Answer
It is an unethical practice to tie up rating with additional services. Because, it unnecessarily forces people / firms to spend money on those services that are not value for them.
Rating agencies can recoup their additional investments through putting in premium pricing on their ratings. If they are so good, those ratings will be purchased even at higher price. For example, Pharmaceutical companies also keep premium pricing on latest medicines and people buy that.
But, bundling of other services with rating is not acceptable as it can drive customers away to other competitor rating agencies. It will also attract regulatory agencies under suitable laws.