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.