[Economy] Link between Credit Rating & Interest Rates

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"DOWNGRADED rating could lead to hiked interest rates and borrowing costs": What does this mean?

first of all,

What is a credit rating agency?

• A credit rating agency is like the Box office review columns in Saturday's newspapers: 2 star out of 5, means waste of money. (Ra.One, Don 2 for example).
• Similarly Credit rating agency (CRA) assigns credit ratings to issuers of bonds and securities : companies, Governments etc. 
• From their rating, you can know issuer's credit worthiness (i.e., its ability to pay back a loan)
• Example of CRA are :Standard & Poor's (U.S.), CRISIL (India)

Standard & Poor's (S&P) credit rating

It has "stars" from AAA to D.
AAA means the guy is most likely to pay back.
D means the guy is most-bogus.

Now consider this:
But if I get lower ratings such a BB, or CCC.... in that case most people wouldn't want to purchase my bonds because they're afraid that I may default on payments.
So how do I motivate them to invest money in my bonds? Obviously by offering higher returns. example

“Anyone who gives me 100 Rs., I’ll give him 170 rupees after 6 months, instead of 120 that I promised earlier!”

• From your side (Lender) what do you see?= hike in interest rate.
• From my side (Borrower) what do I see?=increased cost of borrowing, because I have to offer higher interest rate.

S&P downgraded U.S. long-term credit rating from AAA to AA+
So, Borrowing costs will rise for U.S. government (via treasury bonds), companies etc in long-term because now they'll have to offer higher interest rates.

This was the credit rating for governments, companies, but what about

Credit Rating for individuals

• Credit Information Bureau of India (CIBIL) is a central agency that prepares a report of all loan borrowers who have defaulted on their payment to their banks. 
• In short, CIBIL knows if you are a good borrower or a bad one. Banks seek these reports, called as credit reports, from CIBIL before they sanction you a loan amount.
• If your credit history is not good, your loan request may be rejected, or you may be required to pay higher interest rate.

Non-related question,

What is Angel fund?

A wealthy individual who provides financing to a start-up compny.
Start up company means a company in its earliest stage of development, usually before its IPO.


Feeling bored and confused? Well refresh the concept of security, derivatives, primary and secondary market by clicking me and read this article again.