Question

New Jersey-based Johnson & Johnson is one of only two U.S. firms with debt rated as “Aaa” by Moody’s Investor Services and AAA by the Standard & Poor’s Corporation, the highest global credit rating. Given the firm’s cash-debt ratio, its cash per share ratio, and its rising cash flows, would you advise the firm to raise additional capital by issuing more debt? Why or why not, given the current upward slope of the U.S. Treasury yield curve?

Answer 1

Absolutely not. Upward slope of yield curve means higher interest rates which is inversely proportional to the bond values. the whole system is based on demand and supply. When there is more demand for treasury bills, its prices moves up,but as per the system treasury will give the face value with the interest which is stated initially. this lowers the yield of the t-bills. but the opposite happens when the yield curve of t-bills move upwards. it mainly happens during some economic crisis. the yield curve increases due to low demand of bills which increases the yield as it can be bought at low price. Now as t-bills are known to be safest, consumers prefers them. so, the value of bonds falls because high yield increases the interest rates. so, the riskier bond values go down.