Moody's Investors Service is able to make a profit because
A)most investors are irrational.
B)of the existence of adverse selection problems.
C)fluctuations in interest rates make default risk on corporate bonds difficult to gauge.
D)small investors like the mutual funds they sell.

Question

Quizplus · Accepted Answer

Moody's Investors Service, like other credit rating agencies, profits primarily because of adverse selection problems. Adverse selection occurs when there is asymmetric information between buyers and sellers, leading to a market where bad quality products or risks are more likely to be selected. In the context of financial markets, investors face challenges in distinguishing between good and bad investments due to a lack of information or expertise. Moody's provides credit ratings that help investors assess the default risk of bonds, thereby reducing the information asymmetry and adverse selection problem. This service is valuable to investors, for which Moody's charges a fee, enabling it to make a profit.

Moody's Investors Service Is Able to Make a Profit Because