How do credit ratings impact the cost of borrowing for a company? 1 small paragraph enough
Example 1 answer:(Dont Copy paste Same)
Credit ratings assess risk and the likelihood of a borrower to pay back funds with interest. The higher the credit rating (Aaa, Aa, A) the lower the credit risk to the lender and therefore a lower interest rate. Easier access to low interest capital allows companies to expand and provided the flexibly to seize opportunities within their markets other companies may not.
Exactly the opposite is true for companies with lower credit ratings (Caa, Ca, C, D), they are a higher credit risk to the lender and therefor pay a higher interest rate. Investors looking for higher returns often look to lend to companies lower credit ratings with higher risk. This is all relative to other borrowers, as we see right now with the Fed increasing the federal funds rate credit worthiness alone is not what drives interest rates for companies.
Example 2 Answer:
When the creditworthiness of a company that needs to borrow money increases, its lenders will ask for higher interest rate (risk premium). In other words, if the company’s financial leverage increases, then its credit rating would decrease.
Textbook: Pages 7-17 & 7-21
As credit ratings deteriorate a company is more likely to be unable to make its debt payments and consequently they will have to pay a higher rate of interest on the money they borrow to compensate investors for the risk of default.
Easton, P.D., Wild, J.J., Halsey, R.F, and McAnally, M. L. (2021). Financial Accounting for MBAs (8th ed.). Westmont, IL: Cambridge Business Publishers, LLC. (7-23)
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