What is the primary function of credit-rating agencies?

The primary function of credit-rating agencies is to assess the creditworthiness of debt. These agencies evaluate the ability of issuers of debt, such as corporations and governments, to repay their obligations. They analyze various factors, including financial performance, economic conditions, and management quality, to assign ratings that indicate the risk associated with a particular debt instrument. Such ratings help investors make informed decisions about where to allocate their resources by providing a standardized measure of the credit risk involved.

This role is essential in the financial markets as it contributes to transparency and trust. Investors rely on these ratings to guide their investment choices, particularly when it comes to bonds, loans, and other debt securities. A higher rating generally signifies lower risk, while a lower rating indicates higher risk. By assessing creditworthiness, credit-rating agencies facilitate the flow of capital and contribute to market stability.