Final answer:
The debt from industrial development revenue bonds can affect a corporation's credit quality by increasing financial burden and potentially lowering its credit rating, which affects investor confidence and borrowing costs.
Step-by-step explanation:
Industrial development revenue bonds (IDRBs) are a form of corporate bonds specifically intended to provide funding for industrial projects, and the debt they generate can indeed affect the credit quality of the issuing corporation. If an issuing corporation takes on significant debt through IDRBs but fails to generate adequate revenue from the financed projects, its ability to make payments on these bonds may be jeopardized.
This added financial burden can lead to higher borrowing costs for the company, reflect negatively on its balance sheet, and potentially decrease its credit rating. As a result, investors and lenders might see the company as a higher risk, which could result in diminished confidence and affect the demand or supply of financial capital.
Therefore, the return on such investments needs to weigh up against the risk and potential impact on the corporation's financial health. Especially in economic environments where the U.S. debt level is increasing, businesses may face higher interest rates as they compete with the government for financial resources.
Moreover, if an issuing corporation is unable to meet its bond obligations, bondholders can push for bankruptcy, leading to the liquidation of assets to fulfill the debt. However, diversified investment in bonds from different firms can mitigate the risk of exposure to a single company's potential default.