Question

In: Finance

Which of the following lowers the required interest rate that firms have to pay on their...

Which of the following lowers the required interest rate that firms have to pay on their bonds? Which of the following raises the interest that firms have to pay?

Private placements

Public offerings

Sinking fund provisions

Protective Covenants

Call provisions

Collateral

An active secondary market

A low credit rating

Expert Solution

Firms have to pay higher interest rates if the risk to the bond investor is increased, since bond investors have to compensated for the additional risk. Conversely, firms can pay lower interest rates if the risk to the bond investor is decreased.

Private placements - Risk is increased for bond investors since liquidity is lower in case of privately traded bonds. Hence, this raises the interest rate.

Public offerings - Risk is decreased for bond investors since liquidity is higher in case of publicly traded bonds. Hence, this lowers the interest rate.

Sinking fund provisions - Risk is decreased for bond investors since funds are periodically set aside for the bond's redemption. Hence, this lowers the interest rate.

Protective Covenants - Risk is decreased for bond investors since there are protective restrictions on the actions that a company can take. Hence, this lowers the interest rate.

Call provisions - Risk is increased for bond investors since they face reinvestment risk. Hence, this raises the interest rate.

Collateral - Risk is decreased for bond investors since the bonds are backed by real assets which can be sold by bondholders in case the company defaults. Hence, this lowers the interest rate.

An active secondary market - Risk is decreased for bond investors since liquidity is higher in case of actively traded bonds. Hence, this lowers the interest rate.

A low credit rating - Risk is increased for bond investors since the company has higher credit/default risk. Hence, this raises the interest rate.

jeff jeffy answered 2 years ago

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