Question

As a bond's rating serves as an indicator of its default risk, the rating has a direct, measurable influence on the firm's:

A. earnings per share and dividend payments.

B. cost of using such debt and the bond's interest rate.

C. current assets and the bond's maturity value.

D. tax liability to the federal government.

E. ability to procure raw material for production.

Answer 1

The correct answer is option B.

Bond's rating, which indicates default risk has a direct and measurable influence on the firm's cost of using such debt and the bond's interest rate.

Higher the credit rating, lower the perceived risk of default and hence lower the cost of such debt.

Lower the credit rating, higher the perceived risk of default and hence higher the cost of such debt.

All the other answer options are incorrect.

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