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1. The rating of a Bond may affect the access to loanable funds for a company.

A. True
B. False
2. Bond yield can be divided in two parts to get the default premium.
A. True
B. False
3. Investors base their decisions on the after-tax yield and bonds may have different tax treatments.
A. True
B. False
4. Yields on short-term bonds are NOT more volatile than yields on long-term bonds
A. True
B. False

User Pizza
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1 Answer

1 vote

Final answer:

Bond ratings affect a company's ability to access loans, where higher ratings generally equate to lower borrowing costs. Bond yield can be broken down to assess the default premium, while investors look at the after-tax yield when making investment decisions, considering varying tax treatments. Contrary to what some might believe, yields on short-term bonds can indeed be volatile, sometimes more so than long-term bonds.

Step-by-step explanation:

Understanding the Impact of Bond Ratings, Yields, and Tax Treatments

The rating of a bond significantly affects a company's access to loanable funds, with higher-rated bonds generally leading to better access and lower borrowing costs. This relationship can impact the overall cost of capital for a company.

Bond yield components can often be dissected to identify the default premium, which represents the additional yield that investors demand for bearing the credit risk associated with a bond issuer potentially failing to meet its payment obligations.

Different bonds might have diverse tax treatments, influencing investors' decisions as they often look at the after-tax yield of a bond before investing. This after-tax perspective is vital for understanding the actual return on investment.

The notion that yields on short-term bonds are less volatile than those on long-term bonds is not accurate; short-term bond yields can exhibit significant volatility, often influenced by near-term economic indicators and monetary policy changes.

User Darcher
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