Hi :) please solve this thank you! For the impact on yield you state if its an i
ID: 2738312 • Letter: H
Question
Hi :) please solve this thank you!
For the impact on yield you state if its an increase or decrease
For the cost of borrowing money you state if its more expensive or less expensive
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 Scenario Impact on Yield | | 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. A company's financial health improves XYZ Co.'s credit rating was downgraded from AA to BBB.Explanation / Answer
A company uses debt to buy another company. Such an event is called a leveraged buyout.
The company is going out on the market to borrow money. Supply and demand, you are increasing the supply of bonds out on the market, the demand has not increased. So the price of the bond may fall, demanding more interest and a higher yield.
Impact on yield - Increase
Cost of borrowing Money from bond markets –more expensive
There is an increase in the perceived marketability of a company’s bonds, so the liquidity premium decreases.
Impact on yield - decrease
Cost of borrowing Money from bond markets – less expensive
A company’s financial health improves.
Impact on yield - Increase
Cost of borrowing Money from bond markets – less expensive
XYZ Co.’s credit rating was downgraded from AA to BBB
A downgrade in credit ratings means that the company's default risk has increased, leading to an increased default risk premium and thus higher interest rates. Therefore, it will be more expensive for a company to borrow money from bond markets, and yields will increase.
Impact on yield - Increase
Cost of borrowing Money from bond markets – a) more expensive