# 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

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View this answerThe total cost of debt for a firm is usually given by:

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

As...

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Chapter 14 / Lesson 4Debt 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.

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