quanda26 - Chapter 26 1. Fly-by-night Corporation is in...

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Practice Questions to accompany Mankiw & Taylor: Economics 1 Chapter 26 1. Fly-by-night Corporation is in need of capital funds to expand its production capacity. It is selling short- and long-term bonds and is issuing shares. You are considering the prospect of helping finance their expansion. a. If you were to buy both short- and long-term bonds from Fly-by-night, from which bond would you demand a higher rate of return: short or long term? Why? Answer: Long term, because it is more likely that you may need to sell the long-term bond at a depressed price prior to maturity. b. If Standard and Poor's lowered the credit worthiness of Fly-by-night, would this affect the rate of return you would demand when buying their bonds? Why? Answer: Yes, the credit risk has increased and lenders would demand a higher rate of return. c. If Fly-by-night is issuing both shares and bonds, from which would you expect to earn the higher rate of return over the long run? Why? Answer:
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quanda26 - Chapter 26 1. Fly-by-night Corporation is in...

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