A firm with a low bond rating faces a more severe penalty when the Security Market Line (SML) is relatively steep than when it is not so steep.

Question

Quizplus · Accepted Answer

A steeper SML indicates a higher market risk premium, which leads to higher required returns for risky securities like bonds with low ratings. Therefore, the penalty for a low bond rating is more severe when the SML is steeper.

A Firm with a Low Bond Rating Faces a More