When a company gets closer to financial distress causing expected insolvency costs to increase, lenders will often charge the company a lower interest rate in order to reduce the chance of an actual insolvency occurring.

Question

Quizplus · Accepted Answer

This statement is false. When a company is approaching financial distress, lenders become more risk averse and may charge the company a higher interest rate to compensate for the increased risk of default.

When a Company Gets Closer to Financial Distress Causing Expected