Which of the following best explains why a firm that needs to borrow money would

Question

Which of the following best explains why a firm that needs to borrow money would borrow at long-term rates when short-terms rates are lower than long-term rates? O A firm will only borrow at short-term rates when the yield curve is downward-sloping. O The use of short-term financing over long-term financing for a long-term project will increase the risk of the firm. O The firm's interest payments will be the same whether it uses short-term or long-term financing, so it is essentially indifferent to which type of financing it uses. Credit ratings affect the yields on bonds. Based on the scenario described in the following table, determine whether yields will increase or decrease and whether it will be more expensive or less expensive, as compared to other cpeany to ar Cost of Borrowing Money from Bond Markets Scenario Impact on Yield Xxz Co.'s credit rating was downgraded from AA to 8B8. A company's financial health improves A company uses debt to buy another company. Such an event is called a leveraged buyout. There is an increase in the perceived marketability of a company's bonds, so the liquidity premium decreases Continue without saving 2 3 4 6

Explanation / Answer

(1) A firm would borrow money at long-term rates (although that's more expensive) if the use of short-term financing over long-term financing for a long-term project will increase the risk of the firm

The increase in risk would be caused by differing maturities of it's assets & liabilities.

(2)

(a) If XYZ Co's credit rating was downgraded, then the yields would INCREASE & cost of borrowing would become MORE EXPENSIVE

(b) If a company's financial health improves, then the yields would DECREASE & cost of borrowing would become LESS EXPENSIVE

(c) If a company uses debt to buy another company, then the yields would INCREASE & cost of borrowing would become MORE EXPENSIVE

(d) If there is an increase in the perceived marketability of a company's bonds, then the yields would DECREASE & cost of borrowing would become LESS EXPENSIVE

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.