When a company whose ability to repay its obligations in full is uncertain borrows funds
A)it will have to issue debt with longer maturities than would a company with a lower probability of default.
B)its bonds will sell for higher prices than would the bonds of a company with a lower probability of default.
C)it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans.
D)it must do so through financial markets rather than through financial intermediaries.

Question

Quizplus · Accepted Answer

A company with an uncertain ability to repay its obligations would have to offer higher yields to attract investors to buy their bonds or make loans. This is because the investors would be taking on a greater risk by lending money to a company with a higher probability of default. The company may be forced to issue debt with longer maturities as well, although this is not always the case. The price of the bonds would generally be lower, not higher, due to the increased risk. The company could choose to borrow funds through financial intermediaries or through financial markets, depending on the circumstances.

When a Company Whose Ability to Repay Its Obligations in Full