Why is a higher credit rating favorable in terms of interest rates?

A higher credit rating is favorable in terms of interest rates primarily because it signifies lower risk for lenders. When a borrower, such as a municipality, has a high credit rating, it indicates to lenders that there is a strong likelihood of the borrower being able to meet their financial obligations. Consequently, lenders are willing to offer loans at lower interest rates since they perceive a reduced risk of default. This lower risk allows lenders to feel more secure in their investment, thus making borrowing more cost-effective for municipalities because they pay less in interest over the life of the loan.

Other benefits of a higher credit rating, such as simplification of the borrowing process, a reduced overall debt burden, or the elimination of collateral requirements, are secondary effects that do not directly influence the interest rates as significantly as the perception of risk does. They may enhance borrowing conditions but do not fundamentally change the relationship between credit ratings and interest rates.