Reference no: EM133116910

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?

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.

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.

Scenario	Impact on Yield	Cost of Borrowing Money from Bond Markets
XYZ Co.'s credit rating was downgraded from AA to BBB.	Increase	More expensive
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.