What is the primary role of credit rating agencies?

The primary role of credit rating agencies is to assess the creditworthiness of borrowers, which includes both individuals and institutions as well as various types of debt instruments. This assessment involves evaluating the likelihood that a borrower will default on their obligations and is typically expressed through a rating system that ranges from high-quality investment grades to low-quality speculative grades.

By providing these credit ratings, agencies help investors, lenders, and other financial market participants make informed decisions regarding the risk associated with lending money or investing in certain securities. A high credit rating can lower borrowing costs for borrowers by allowing them to secure loans at lower interest rates. In contrast, a low credit rating may indicate higher risk, leading to higher costs or difficulty in obtaining financing.

This function is critical to the functioning of financial markets, as it enhances transparency and provides a framework for comparing the credit risk of different borrowers. As a result, the correct answer highlights the essential purpose of credit rating agencies in maintaining confidence and efficiency within the financial system.