International service2 - Assignment Example

Credit Ratings Credit ratings refer to the current and the latest opinion with relation to the relative creditworthiness of certain debt. It plays the critical role of loan evaluation, aiming at differentiating the credit quality. It does respond to the demands of the market to have latest t information on the same. Credit rating is not a rough audit or a recommendation with an aim to buy, hold or sell a security bond that is rated. In the security market, credit rating is sometimes misunderstood or overrated.

It, therefore, leads to a great gap between the lenders and the borrowers since there is a rift of ideologies with reference to creditworthiness. Credit ratings play a fundamental role in a reduction of the information asymmetry. Such information concerning the value of securities or bonds is often a subject to distortion and bias, but the rating portfolio chips in to alleviate the crises.The information provided for a certain bond or security influences the intensity of participation of its sales and value in the financial markets.

For a borrower to qualify in the stage of borrowing, the lender has to reconsider a variety of factors, one of which is credit rating. Third parties also utilize the same analysis to establish the confidence of the bond progress.Primarily, credit ratings are very essential in reducing such information gap. One has to spot a critical difference between a real borrower and a risk borrower. In this way, credit ratings will come hand in hand with their in-depth information. The information is independent and not subject to bias.

Private investors may not keep in close useful trend with the companies that issue the security. Therefore, it is important for an intermediary to come in between the companies giving their results in terms of ratings. The ratings will not only aid in investment portfolios but also in transparency and disclosure of appropriate bonds purchase in the coming days.Most significantly, credit rating process utilizes the entire firm’s financial data, financial trends, accounting information and other charters to come up with a conclusive information of rating the firm.

The evaluation process is rigorous and consumes much time. Those analyzing the data always strike a clear balance in the assessment tools to ensure that there is no one firm that is disadvantaged. The information is also withheld d and not disclosed to other competitive firms, hence high level of confidentiality. With the rigorous process utilized in data collection, analysis and final verification, the results are trustworthy and dependable by the investors.Furthermore, credit rating firms have a code of conduct that dictate the methodology to follow when evaluating the financial markets.

The strict follow-up and guidelines do enhance uniformity in analysis process. Corruption is minimal since they follow the codes and the principles outlined. Clear information can hence flow from investors to the capital markets simulating the investment mood. There is clear and formal information passed of the ability of a bond-issuing agent to stick to its demands and promises (Czarnitzki and Kraft, pg. 1065).Essentially, rating simply acts as a clear channel for transfer of new information to the marketplace, hence the financial markets air one voice and move to a similar direction when it comes to investment.

Credit rating can be positive or negative. It all affects the monitoring effect of sovereign bond issue. In summation, the ratings are essential in financial asymmetric information alleviation in that its data imputes are in-depth and private to the financial firm, they utilize great techniques to analyze and process the data, and their objective its provision of quality information to the investors. Thus, it is a trusted source of financial information.Work CitedCzarnitzki, Dirk, and Kornelius Kraft.

“Are Credit Ratings Valuable Information?” Applied Financial Economics 2007 : 1061–1070.