Experience shows that when times interest earned falls below 1.5 to 2.0 and remains at that level or lower for several time periods, the default rate on liabilities increases sharply.

Question

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This statement is true. When the times interest earned falls below 1.5 to 2.0 and remains at that level or lower for several time periods, it indicates that a company is struggling to generate enough earnings to cover its interest expenses. This can lead to financial distress and an increased risk of defaulting on liabilities. Research has shown that default rates on corporate bonds tend to increase sharply when the times interest earned falls below this threshold.

Experience Shows That When Times Interest Earned Falls Below 1