Question

Which one is the situation that a bondholder doesn't like?

a.
The issuing company's debt ratio is steadily declining.

b.
The issuing company's interest coverage ratio is steadily rising.

c.
Market interest rates are steadily rising.

d.
The issuing company's net cash flow from operating activities is steadily increasing.

Answer 1

A bondholder dislikes when market interest rates rise because it reduces the attractiveness and value of existing bonds which have lower interest rates compared to newly issued bonds.

Step-by-step explanation:

The situation that a bondholder does not like is when market interest rates are steadily rising. When a company issues bonds, the interest payments on those bonds are fixed at the coupon rate. If market interest rates increase after the bonds have been issued, new bonds would be issued with higher interest rates, making the existing bonds with fixed lower rates less attractive. This decrease in attractiveness leads to a decrease in the market value of the existing bonds since investors would prefer new bonds that pay more interest.

For example, if Ford has issued bonds with a 5% coupon rate when the market interest rate was 3%, the bonds would have been attractive to investors. However, if the market interest rate rises to 4%, the existing Ford bonds become less attractive, and their value would typically decrease because they offer a lower return than new bonds issued at the higher rate.