MindTap- Cengage Learning X ourses.aplia.com/af/servlet/quiz?quiz action-takeQui
ID: 2615682 • Letter: M
Question
MindTap- Cengage Learning X ourses.aplia.com/af/servlet/quiz?quiz action-takeQuiz&qui; z probGuid-QNAPCOA8010100000041ca2610 Attempts:6 Keep the Highest: 6/9 9. Interest rates and decisions Aa Aa Which of the following best explains why a firm that needs to borrow money would borrow at long-term rates whe short-terms rates are lower than long-term rates? O A firm will only borrow at short-term rates when the yield curve is upward-sloping. O Short-term interest rates are more volatile than long-term interest rates. O Firms will always be better off when they borrow using long-term financing even if the yield curve is upward-sloping 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 players in the market, for a company to borrow money from the bond market. Cost of Borrowing Money from Bond Markets Scenarico Impact on Yield Ziffy Corp.'s credit rating was downgraded from AAA to A. Previously, Ferro Co. had only used short-termdebt -D ???????? financing. The company now finances its current assets such as inventories and receivables with short-term debt, and it finances its fixed assets such as buildings and equipment with long-term debt. ABC Real Estate is a commercial real estate firm that primarily uses short-term financing, while its competitors primarily use long-term financing. Interest rates have recently increased dramaticaly Bengotts Inc. has increased its market share from 15% --7 -1. D i to 37% over the last year while maintaining a profit margin greater than the industry average.Explanation / Answer
Q.1). Here as per the liquidity preference hypothesis, upward sloping yield curve shows that the investors are investing more in short term and hoping to invest more in long term later. And this is an indication of economic expansion as well, that high economic growth is expected to take place in future and also high inflation. So to keep in tact with this the yileds also grow with time. Hence option (c) is currect.
Q.2).
Cost of borrowing
from bond markets
Scenario Impact on yieldCost of borrowing
from bond markets
1. increase increase 2. increase increase 3. decrease increase 4. decrease decrease