Question

Suppose that in a given bond market, there is currently no information that can help potential bond buyers to distinguish between bonds. Which bond issuers have an incentive to disclose information about their companies? Explain why.

Short answer

An issuer of a high-quality (low-risk) bond would be compelled to provide information. This is because when data is collected and made public, potential bond buyers may make more informed decisions.

Step-by-step solution

Content Introduction

A bond rating is a letter-based credit scoring plan used to pass judgment on the quality and reliability of a bond. Higher appraised bonds, known as speculation grade bonds or great quality bonds, are seen as more secure and more steady ventures. Such contributions are attached to public companies and government elements that gloat uplifting perspectives.

The higher a security's evaluating, the lower the financing cost it will convey, all else equivalent.

Content Explanation

The guarantor of a decent quality (generally safe) bond would have a motivation to unveil data, though the backer of a terrible quality (high risk) bond wouldn't. This is on the grounds that when data is collected and made free, potential bond purchasers can settle on a superior choice. The backer of the terrible quality bond will most presumably wind-up getting a below than the normal cost.

Note that without a trace of data, each bond sells at the normal cost.