Final answer:
A change in credit rating affects financial liabilities by influencing the cost of borrowing and market value of bonds, such as notes, corporate bonds, and derivative liabilities.
Step-by-step explanation:
The student's question pertains to the concept of how a change in credit rating affects financial liabilities such as notes or bonds and derivative liabilities. A bond is a method of financial capital acquisition in which the borrower agrees to repay the borrowed amount with interest over a set future period. Entities issuing bonds can range from corporations (corporate bonds) to various levels of government, including municipal bonds by cities, state bonds by states, and Treasury bonds by the federal government.
A change in credit rating can impact the cost of borrowing and the market value of bonds. Credit rating agencies assess the borrower's ability to repay debt, influencing the interest rates and attractiveness of the bonds to investors. For example, if a company's credit rating improves, it can borrow money at lower interest rates, as investors view the company as a lower risk. Conversely, a decrease in credit rating can lead to higher borrowing costs and a reduced value of outstanding bonds.