What is the primary purpose of a credit rating agency?

• A. To manage investment portfolios for clients
• B. To assess the creditworthiness of issuers
• C. To provide legal advice for debt securities
• D. To conduct financial audits

Answer: (B)

The primary purpose of a credit rating agency is to assess the creditworthiness of issuers, such as corporations, municipalities, and countries. This assessment involves evaluating the issuer's ability and willingness to meet its financial obligations, primarily the timely repayment of debt. The ratings provided by these agencies, which range from high-quality investment grades to lower-quality speculative grades, serve as a valuable tool for investors. They help investors make informed decisions about the risk associated with investing in various debt instruments. By establishing a relative ranking of credit risk, these agencies contribute to the efficiency of capital markets, allowing investors to understand the risk-return profile of their potential investments. This function is critical in promoting transparency and helping to maintain stability within the financial system.