When there is an upward sloping yield curve and interest rates are forecast to increase a firm decides to restructure its outstanding debt to longer term then in the short-term the company:
A) faces an immediate decrease in its costs of funds.
B) faces an immediate increase in its costs of funds.
C) is reducing its basis risk.
D) is reducing its business risk.

Question

Quizplus · Accepted Answer

When a firm restructures its outstanding debt to longer term in an environment of an upward sloping yield curve and forecasted interest rate increases, it faces an immediate increase in its costs of funds. This is because longer-term debt typically carries higher interest rates than short-term debt, especially in an upward sloping yield curve scenario.

When There Is an Upward Sloping Yield Curve and Interest