Check mark the correct statements. Thank You! Why do entities borrow in the form
ID: 2788902 • Letter: C
Question
Check mark the correct statements.
Thank You!
Why do entities borrow in the form of debt obligations? Economies around the world were still recovering during 2012 after the 2008-2009 recession. Governments and central banks continued their efforts to facilitate economic recovery. The U.S. Federal Reserve Bank (the Fed) kept interest rates at record lows. This, along with several other reasons, found the bond markets flooded with new bond issues. The following article highlights some reasons why firms issued debt obligations to raise funds In the context of the reasons why entities borrow in the form of bond issues, which statement is correct? Check all that apply orporate-Bond Issuers Race to the Market as U.S. Yields Approach Record Low On April 25, 2011, the Fed announced that short-term interest rates would be kept near zero through late 2014. Because corporate bonds are indexed to Treasury yields and the Treasury yield hit nearly all-time lows, issuing conditions became investment-grade borrowers when lending money to corporations, banks often include restrictive covenants, such as maintaining a certain level of debt-to-equity ratio at all times when bonds issued by foreign governments offer conducive for higher yields than U.S. Treasury yields, corporate issuers in the United States get the opportunity to issue debt securities at low costs Europe's debt crisis fueled the demand for relatively safer U.S. securities, and the market became more confident that Europe's crisis would not significantly disrupt recovery of the world's largest economy when government entities need to raise funds to finance projects, they issue debt securities in which investors are the creditors who usually earn a fixed rate of return from the borrower Several bond issues-such as general obligation (GO) bonds and revenue bonds-offer federally tax-exempt income that attracts investors seeking tax-free income This triggered issuers to announce investment-grade supply benefiting from the low borrowing costs. Companies such as IBM,Explanation / Answer
When a company requires money then it may either take loan from bank or buy bonds. If it takes loans from banks then there are certain requirements that need to be fulfilled. In other words, there are certain restrictions when a bank is lending money. But when a company is buying bonds, there are no such restrictions. Thus, the first option that entities borrow in the form of bond issues as when banks lend money there are certain restrictive covenants is correct.
When the bonds issued by foreign countries have a higher yield than U.S. Treasury yields then the demand for foreign bonds will be high. The demand for U.S. Treasury bonds will be low. So the price of such bonds will also be low. Hence, entities borrow in the form of bond issues due to the low cost. So, the second option is also correct.
The third option i.e. fixed rate of return is earned by the investors of bonds is another reason why the entities borrow in the form of bond issues. The entities will be earning a fixed rate of guaranteed return.
Lastly, the income from the bonds is a tax-free income which attracts the entities to invest in bond issues.
Thus, the reasons why entities borrow in the form of debt obligations is due to all the four options given in the question.