26 Let’s say you own a firm that produces and sells Ping-Pong tables. The name o

Question

26           Let’s say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB. If a ratings agency upgrades your bond rating to AA, how will this affect the price of your bond?

             A. price will increase          B. price will decrease         C. price will stay the same

27           Let’s say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB. If a ratings agency upgrades your bond rating to AA, how will this affect your cost of borrowing?

               A. cost of borrowing will decrease B. cost of borrowing will stay the same   

             C. cost of borrowing will increase

28           Which of the following statements provides the clearest reason for why it is beneficial to the U.S. when China buys U.S. government bonds?

A. When China owns U.S. financial assets, they have no reason to go to war with the United States.

             B. When China owns U.S. financial assets, they own a part of the country.       

             C. When China owns U.S. financial assets, they help to keep domestic interest rates low.               

             D. When China owns U.S. financial assets, they can provide U.S. companies with low-cost labor.    

             E. When China owns U.S. financial assets, they can assist U.S. companies with new technology.

Explanation / Answer

26. a) Price of bond will increase

27. b) Since if the bond prices go up, cost of borrowing goes down. Further, if the rating of the bonds improve, the credit risk is reduced, hence cost of borrowings will decrease

28. c )  When China owns U.S. financial assets, they help to keep domestic interest rates low. This is because, Whe there would be an increase in demand for U.S. Bonds, the bond prices will go up and hence the interest rates would be lower.

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