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Credit rating

A credit rating is a graded assessment of how likely a borrower is to repay its debt in full and on time, used by lenders and bond investors to price and compare credit risk.

ByHoang TruongUpdated

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Credit ratings rank borrowers from a top tier of the safest issuers down to a speculative tier with materially higher default risk. On a €10,000,000, five-year loan at a 3.00% benchmark rate, a top-tier borrower pays a 0.80-point spread, or €380,000 a year; a speculative-tier borrower pays a 3.50-point spread, or €650,000 — €270,000 more for the same loan.

Where it fits
SubjectCorporate FinanceCoreTopicBond & Equity ValuationCore

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PracticeCORE

A company wants to borrow €5,000,000 for one year. The benchmark risk-free rate is 2.50%. A highly rated (investment-grade) borrower pays a credit spread of 0.60 percentage points over the benchmark, while a lower-rated (speculative-grade) borrower pays a spread of 4.00 percentage points over the same benchmark. How much MORE annual interest does the lower-rated borrower pay compared to the highly rated borrower, for the same €5,000,000 loan?

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