If a company gets concessions from labor in union negotiations, one would expect a(n) _____ in the risk premia on its bonds due to a shift in the ____ its bonds.
A) increase; demand for
B) decrease; demand for
C) increase; supply of
D) decrease; supply of

Question

Quizplus · Accepted Answer

When a company secures concessions from labor in union negotiations, it typically means a reduction in labor costs and potentially more stable future cash flows. This can lead to a perception of decreased risk by investors, increasing the demand for the company's bonds. As demand for the bonds increases, the risk premium, which is the extra yield over risk-free securities that investors require to hold a company's bonds, would likely decrease. This is because investors view the company's debt as being safer or less risky, thus requiring a smaller premium to hold it.

If a Company Gets Concessions from Labor in Union Negotiations