The following solution is suggested to handle the subject “10. Ierust Plus and decisions Suppose that a firm is facing an upward-sloping yield curve and…“. Let’s keep an eye on the content below! Question “10. Ierust Plus and decisions Suppose that a firm is facing an upward-sloping yield curve and…”
 10. Ierust Plus and decisions Suppose that a firm is facing an upward-sloping yield curve and needs to borrow money to invest in production. Does this mean that the firm should consider borrowing only at short-term rates? No, the firm needs to take the volatility of short-term rates into account. Yes, using short-term financing will give the firm the lowest possible interest rate over the life of the project. No, an upward-sloping yield curve means that the firm will get a lower interest rate if it uses long-term financing. 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. Impact on Yield Cost of Borrowing Money from Bond Markets Scenario XYZ Co.’s credit rating was downgraded from AA to BBB. There is an increase in the perceived marketability of a company’s bonds, so the liquidity premium decreases. A company uses debt to buy another company. Such an event is called a leveraged buyout. A company’s financial health improves. Answer1. The firm must take into consideration the volatility of short-term rates. 2. Increases are more expensive
A-/A3 are a pair of rating categories issued by two different rating agencies, Moody's and S&P, to reflect long-term investment grade bond creditworthiness. Both A- and A3 represent medium-level investment grade credit ratings for a debt issuer or a debt instrument.
The credit ratings assigned by the various rating agencies are based primarily upon the insurer's or issuer's creditworthiness; in a sense, they are a quantified assessment of the creditworthiness of a borrower. A- and A3, like all ratings, can be interpreted as a direct measure of the probability of default. However, credit stability and priority of payment are also factored into the rating. A-/A3 ratings are issued to long-term bond issuers by Moody's and S&P, respectively. The rating of the issuer designates the creditworthiness of the issuer. A-/A3 is the seventh-highest rating a debt issuer can receive. It is four rankings above the cutoff that separates investment grade debt from high-yield, or non-investment grade debt. The A-/A3 rating signifies that the issuer or carrier has mostly financial backing and some cash reserves. The risk of default for investors or policyholders is somewhat low.
A-/A3 is a credit rating in the middle of the investment grade credit ranking system. The rankings for Moody's and S&P from highest to lowest in the investment grade category are Aaa/AAA, Aa1/AA+, Aa2/AA, Aa3/AA-, A1/A+, A2/A, A3/A-, Baa1/BBB+, Baa2/BBB and Baa3/BBB-. XYZ Corp is looking to raise capital by issuing long-term debt. It produces a consumer product that used to be popular but has lost market share recently, and the company's revenues have been shrinking. XYZ is experiencing reduced free cash flow and its balance sheet fundamentals are weakening. However, the company still has a great record of servicing its debt. As a result, Moody's and S&P rank XYZ's debt an A-/A3. Investors should be aware that an agency downgrade of a company's bonds from "BBB" to "BB" reclassifies its debt from investment grade to "junk" status. Although this is merely a one-step drop in credit rating, the repercussions can be severe. The drop to junk status telegraphs that a company may struggle to pay its debts. The downgraded status can make it even more difficult for companies to source financing options, causing a downward spiral as costs of capital increase.
In order to continue enjoying our site, we ask that you confirm your identity as a human. Thank you very much for your cooperation. Credit ratings affect the yields on bonds. Based on the scenario ‘s described below, determine whetheryields will increase or decrease and whether it will be more expensive or less expensive, as compared toother players in the market, for a company to borrow money from the bond market.XYZ Co.’s credit rating was downgraded fromAA to BBBImpact on yield- a) Increase b decreaseCost of borrowing Money from bond markets – a) more expensive b) less expensiveA company uses debt to buy another company. Such an event is called a leveraged buyout.Impact on yield- a) Increase b) decreaseCost of borrowing Money from bond markets – a) more expensive b) less expensiveThere is an increase in the perceived marketability of a company’s bonds, so the liquidity premiumdecreases.Impact on yield- a) Increase b) decreaseCost of borrowing Money from bond markets – a) more expensive b) less expensiveA company’s financial health improves.Impact on yield- a) Increase b) decreaseCost of borrowing Money from bond markets – a) more expensive b) less expensive Suppose that a firm is facing an upward-sloping yield curveand needs to borrow money to invest in production. Does thismean that the firm should consider borrowing only at short-term rates? No, an upward-sloping yield curve means that thefirm will get a lower interest rate if it uses long-termfinancing. No, the firm needs to take the volatility of short-term rates into account. Yes, using short-term financing willgive the firm the lowest possible interest rate over the life ofthe project. Credit ratings affect the yields on bonds. Based |
Xyz co.’s credit rating was downgraded from aa to bbb.
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