Company Y has a AAA credit rating from Standard and Poor's

Accounting Aug 17, 2020

Company Y has a AAA credit rating from Standard and Poor's. The company can obtain long-term loans from banks, from which it could borrow at the government bond yield rate plus a premium of 5%. The government bond yield is 10%. AAA rated bonds generally have a spread of 2% (200 points) in relation to government bonds. Which financing option should Company Y choose?

Expert Solution

Cost of long-term loans from banks = 10% + 5%

= 15%

Cost of AAA rated bonds = 10% + 2%

= 12%

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