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.ScenarioImpact on YieldCost of Borrowing Money from Bond MarketsXYZ 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. A company’s financial health improves. There is an increase in the perceived marketability of a company’s bonds, so the liquidity premium decreases.

The objective of the question is to understand how different scenarios affect the yield on bonds and…

Answered: Credit ratings affect the yields on…

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter11: Notes, Bonds, And Leases

Section: Chapter Questions

Problem 8Q

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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.

Scenario	Impact on Yield	Cost of Borrowing Money from Bond Markets
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.
A company’s financial health improves.
There is an increase in the perceived marketability of a company’s bonds, so the liquidity premium decreases.