The market value of short-term debt is very close to the book value of debt for healthy firms.

Question

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Short-term debt is typically recorded on the balance sheet at its book value, which represents the principal amount owed plus any accrued interest. In healthy firms, the market value of short-term debt is usually very close to this book value, as investors perceive low risk of default and therefore do not require a higher return. This is because short-term debt usually has lower interest rates and a shorter maturity period, making it less risky compared to long-term debt. However, for financially distressed firms or those with a high probability of default, the market value of their short-term debt may be significantly lower than its book value.

The Market Value of Short-Term Debt Is Very Close to the Book