Pension funds and trusts may be limited to investing in securities of particular credit rating, e.g., AAA.
Question:
Pension funds and trusts may be limited to investing in securities of particular credit rating, e.g., AAA. To appeal to such investors, investment banks that issue structured products need to meet the required credit rating.The credit rating agencies, Fitch Ratings, Moody's Investor Services, and Standard & Poor's Ratings Services, will rate a security and, after issuance, continue to update the rating over the life of the security.The agency charges the issuer a fee for rating as well as a fee for updating.
(a) Consider the managers of an investment bank which plans to issue a structured product.Would they be more concerned about the initial rating
or updating?
(b) How does your answer to (a) depend on the turnover of investment bank managers?
(c) What is the incentive for the rating agency to rate a structured product as AAA?
(d) Who would be more affected by inaccuracy in updating: the issuer or the rating agency?