Suppose that information is made public that Mammoth Computer is having severe financial difficulties. The effect will be to
A)increase the yield on Mammoth's long-term bonds.
B)increase the yield on rival Orange Computer's long-term bonds.
C)lower the yield on Mammoth's long-term bonds.
D)increase the yield on both Mammoth's long-term bonds and rival Orange Computer's long-term bonds.

Question

Quizplus · Accepted Answer

The disclosure of Mammoth Computer's financial difficulties is likely to increase the perceived risk of investing in its bonds, which will lead to a decrease in demand and an increase in the yield offered to investors. This relationship between risk and yield means that the yield on Mammoth's long-term bonds will increase.

Suppose That Information Is Made Public That Mammoth Computer Is