The effect to the investors of credit rating agencies failing to

price risk
1.0 Introduction

Financial market is a platform for investors to invest their funds with the aim of
maximizing their revenues at a certain level of risk. Risk-averse investors will look for
securities that has relatively low risk and vice versa through referring to the ratings of the
securities. The purpose of doing this paper is to determine the impact to investors if they
fail to price risk efficiently and the circumstances lead to failure of credit rating agencies.

1.1 Background of the study

Credit rating agencies are responsible in providing qualitative statement on

creditworthiness of entities and their financial obligations. Well-known credit rating
agencies are non-other than Standard and Poor, Moodys and Fitch Incorporate. Due to
the globalization of financial market, credit rating agencies have expanded tremendously
over the years as the dependence and reliability towards the ratings is increasing gradually.

Ratings credited towards the issuers of securities varied from AAA to D. AAA
indicates high quality of investment grade and low credit risk where the issuers are unlikely
to be in financial distress. While C and D ratings of certain securities are considered as
junk bond that is not worth buying as the investors will be entitled into credit risk where
their money invested might be on the verge of losing.

Ratings should reflect changes in the credit quality from the perspective of
investors and it shouldnt be reversed too vigorously within one year time. Investors who
are concerning about the returns, will expect stability of ratings and less frequent portfolio
rebalancing as it requires more work and exposing them to higher risk as well.

However, under certain circumstances, credit rating agencies have failed to fulfill
their responsibilities precisely, controversial arises when part of the contributing reason to
financial crisis was the failure to price risk
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