Question : What is the purpose of a credit rating agency?
Option 1: To determine the dividend payout ratio of a company
Option 2: To evaluate the risk of default on debt securities
Option 3: To manage the issue of preference shares
Option 4: To regulate the secondary market trading
Correct Answer:
To evaluate the risk of default on debt securities
Solution : The correct answer is (b) To evaluate the risk of default on debt securities.
The purpose of a credit rating agency is to evaluate the creditworthiness and risk of default associated with debt securities issued by companies or governments. Credit rating agencies assess the ability of the issuer to meet its financial obligations and assign credit ratings that reflect their opinion on the creditworthiness of the issuer.
Therefore, the primary purpose of a credit rating agency is to evaluate the risk of default on debt securities, such as corporate bonds or government bonds, and provide credit ratings that indicate the creditworthiness of the issuers.
