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 The use of short-term financing over long-term financing for a long-term project will increase the risk of the firm 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. O A firm will only borrow at short-term rates when the yield curve is downward-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 Scenario Impact on Yield A company uses debt to buy another company. Such an event is called a leveraged buyout. A company's financial health improves. There is an increase in the perceived marketability of a company's bonds, so the liquidity premium decreases. XYZ Co.'s credit rating was downgraded from AA to BBB.

Explanation / Answer

As per rules I will answer the first 4 sub parts of this question.

1: The use of short term financing over long term financing for a long term project will increase the risk of the firm.

(Long term assets should be financed with long term financing so that there is no trace of repayment over the period the assets are in use. So a businessman Gaurav at long term rates to finance long term projects. )

2. Yield: Increase

3. Cost: Increase

If a company uses debt to buy another company the yield will increase and cost of borrowing money from Bond markets will also increase since the credit rating of the company will go down.

4: Yield Increase

5. Cost Decrease

If a company's financial health improves the yield of the business will increase while the cost of borrowing money will go down since the credit rating of the company will increase.

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