Which of the following risk factors are the most important for purchasers of long-term high-grade...

Question:

Which of the following risk factors are the most important for purchasers of long-term high-grade bonds?

a. The ability to pay interest when due

b. The ability to pay principal upon maturity

c. Limited marketability

d. Purchasing power risk

Short-term Vs. Long-term Debt:

In general, there are two types of debt, short- and long-term. Short-term debt is debt that must be repaid in less than one year. It is listed on the balance sheet in the current section of the balance sheet. Long-term debt is debt that is be paid off in more than one year. Creditors and debtors like to compare short-term debt to long-term debt as a measure of liquidity. The ratio is referred to as the current ratio.

Answer and Explanation:

The answer is: a. The ability to pay interest when due . While there's always a risk that the company will be unable to repay the principal, the risk with a high-grade bond is connected to the threat of lower interest payments. The longer the term, the longer the holder is locked into an interest rate. If rates are rising, this is bad for the long-term bond holder because they won't be able to get paid at the higher rate.


Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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