Which of the following best explains why a firm that needs to borrow money would borrow at long-term rates whenshort-terms rates are lower than long-term rates?Firms will always be better off when they borrow using long-term financing even if the yield curve isupward-sloping.Short-term interest rates are more volatile than long-term interest rates.A firm will only borrow at short-term rates when the yield curve is upward-sloping.Credit ratings affect the yields on bonds. Based on the scenario described in the following table, determine whetheryields will increase or decrease and whether it will be more expensive or less expensive, as compared to otherplayers in the market, for a company to borrow money from the bond market.Cost of Borrowing Money fromImpact on Yie ldScenarioBond MarketsPreviously, Ferro Co. had only used short-term debtfinancing. The company now finances its current assetsDecreaseIncreasesuch as inventories and receivables with short-termdebt, and it finances its fixed assets such as buildingsand equipment with long-term debt.Bellgotts Inc. has increased its market share from 15%to 37% over the last year while maintaining a profitmargin greater than the industry average.Ziffy Corp.'s credit rating was downgraded from AAA toA.ABC Real Estate is a commercial real estate firm thatprimarily uses short-term financing, while itscompetitors primarily use long-term financing. Interestrates have recently increased dramatically Cost of Borrowing Money fromBond MarketsMore expensiveLess expensive

Question
Asked Oct 30, 2019
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Which of the following best explains why a firm that needs to borrow money would borrow at long-term rates when
short-terms rates are lower than long-term rates?
Firms will always be better off when they borrow using long-term financing even if the yield curve is
upward-sloping.
Short-term interest rates are more volatile than long-term interest rates.
A firm will only borrow at short-term rates when the yield curve is upward-sloping.
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
Impact on Yie ld
Scenario
Bond Markets
Previously, Ferro Co. had only used short-term debt
financing. The company now finances its current assets
Decrease
Increase
such as inventories and receivables with short-term
debt, and it finances its fixed assets such as buildings
and equipment with long-term debt.
Bellgotts Inc. has increased its market share from 15%
to 37% over the last year while maintaining a profit
margin greater than the industry average.
Ziffy Corp.'s credit rating was downgraded from AAA to
A.
ABC Real Estate is a commercial real estate firm that
primarily uses short-term financing, while its
competitors primarily use long-term financing. Interest
rates have recently increased dramatically
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Which of the following best explains why a firm that needs to borrow money would borrow at long-term rates when short-terms rates are lower than long-term rates? Firms will always be better off when they borrow using long-term financing even if the yield curve is upward-sloping. Short-term interest rates are more volatile than long-term interest rates. A firm will only borrow at short-term rates when the yield curve is upward-sloping. 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 Impact on Yie ld Scenario Bond Markets Previously, Ferro Co. had only used short-term debt financing. The company now finances its current assets Decrease Increase such as inventories and receivables with short-term debt, and it finances its fixed assets such as buildings and equipment with long-term debt. Bellgotts Inc. has increased its market share from 15% to 37% over the last year while maintaining a profit margin greater than the industry average. Ziffy Corp.'s credit rating was downgraded from AAA to A. ABC Real Estate is a commercial real estate firm that primarily uses short-term financing, while its competitors primarily use long-term financing. Interest rates have recently increased dramatically

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Cost of Borrowing Money from
Bond Markets
More expensive
Less expensive
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Cost of Borrowing Money from Bond Markets More expensive Less expensive

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Expert Answer

Step 1

The short-term rates of interest are much volatile when compared to the long-term rates of interest.

Justification:

As the short-term rates of interest are much volatile in nature, it is better for the companies to borrow fund at a long-term rate especially when the rates of short-term is longer than the rates at long-term.

Step 2

Scenario 1:

Ferro Company had just utilised the short-term debt financing. At present, the firm funds its current assets like receivables and inventories with short-period debt and it funds its fixed assets like equipment and buildings with long-period debt - the yield reduces or decreases and the borrowing cost is less expensive.  

Scenario 2:

Bellgotts incorporation has raised its 15% market share...

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