Question

Credit ratings affect the yields on bonds. Based on the scenario described in the following table, determine whether yields will increase or decrease and whether it will be more expensive or less expensive, as compared to other players in the market, for a company to borrow money from the bond market.

Cost of Borrowing Money from
Scenario Impact on Yield Bond Markets
A company's financial health improves.
There is an increase in the perceived
market ability of a company's bonds,
so the liquidity premium decreases.
XYZ Co.’s credit rating was downgraded
from AA to BBB.
A company uses debt to buy another company.
Such an event is called a leveraged buyout.

Answer 1

Please find the detailed answer in the explanation section

Step-by-step explanation:

1. A company's financial health improves -

In this situation, The yield will decrease.

Cost of borrowing will be less expensive.

2. There is an increase in the perceived market ability of a company's bonds, so the liquidity premium decreases -

The yield decreases

The cost of borrowing money from bond markets is less expensive

3. XYZ Co.’s credit rating was downgraded from AA to BBB -

The yield will increase.

Cost of borrowing will be more expensive

4. A company uses debt to buy another company such an event is called a leveraged buyout -

The yield will increase.

Cost of borrowing will be more expensive