Assume that the risk-free rate increases. What impact would this have on the cost of debt?

Question:

Assume that the risk-free rate increases. What impact would this have on the cost of debt?

Cost of Debt:

The sources of financing which are prominently used for investing in the assets of any firm are the equity financing and the debt financing. The cost of debt is usually lower than the cost of equity as debt is less risky than the equity. The debt further consists of current portion and non-current portion depending upon the maturity.

Answer and Explanation: 1

Become a Study.com member to unlock this answer!

View this answer

The total cost of debt for a firm is usually given by:

  • = Risk-free rate + default risk premium + liquidity risk premium + maturity risk premium

As...

See full answer below.


Learn more about this topic:

Loading...
The Cost of Debt & Preferred Stock

from

Chapter 14 / Lesson 4
2.5K

Debt or equity, called stock, is used, usually alongside capital, to finance the expansion and growth of a corporation. Discover the two types of debt, their associated costs, and the costs of issuing preferred stock.


Related to this Question

Explore our homework questions and answers library