Purpose of Credit Ratings

Investors in securities accept the risk that the issuer will default on coupon payments or fail to repay the principal in full on the maturity date. Generally, credit risk is greater for securities with a long maturity, as there is a longer period for the issuer to potentially default. For example, if a company issues 10-year bonds, investors cannot be certain that the company will still exist in 10 years time. It may have failed and gone into liquidation some time before that. That said, there is also risk attached to short-dated debt securities indeed, there have been instances of default by issuers of commercial paper, which is a very short-term instrument. 

The prospectus or offer document for an issue provides investors with some information about the issuer so that some credit analysis can be performed on the issuer before the bonds are placed. The information in the oflFer documents enables investors themselves to perform their own credit analysis by studying this information before deciding whether or not to invest. Credit assessments take up time, however, and also require the specialist skills of credit analysts. Large institutional investors do, in 

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