If a company gets concessions from labor in union negotiations, one would expect a(n) _____ in the risk premia on its bonds due to an increase in
A) increase; default risk.
B) decrease; default risk.
C) increase; liquidity.
D) decrease; liquidity.

Question

Quizplus · Accepted Answer

When a company secures concessions from labor in union negotiations, it typically means that the company has successfully negotiated for lower labor costs or more favorable labor terms. This reduction in costs or improvement in labor conditions can lead to an increase in the company's financial stability and profitability. As a result, the company's ability to meet its debt obligations may improve, leading to a decrease in the perceived default risk by investors. Lower default risk makes the company's bonds more attractive, reducing the risk premium that investors demand for holding the company's debt. Therefore, the correct answer is a decrease in the risk premia on its bonds due to a decrease in default risk.

If a Company Gets Concessions from Labor in Union Negotiations