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Credit rating definition
A credit rating is an assessment of how likely a borrower is to repay its debt on time. It applies to companies, governments, and individual debt instruments such as bonds.
Credit ratings are issued by rating agencies and shown as letter grades such as AAA, BBB, or BB. A higher grade signals lower default risk and a lower grade signals higher risk, and the rating feeds directly into the borrowing cost, bond yield, and investor demand the issuer faces.
Ratings fall into two broad bands. A rating at or above BBB- is investment grade and points to lower default risk; anything below is high yield, also called speculative or junk, and carries higher risk and a higher yield. A downgrade can lift an issuer's funding costs, while an upgrade can improve market confidence.
Credit rating Example
A company issues a bond with a BBB credit rating. Investors treat the bond as investment grade but still watch the company's debt level, cash flow, and earnings.
If the company's finances weaken, the rating agency may downgrade the bond. Investors then demand a higher yield to make up for the higher credit risk.
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