9. Interest rates and decisions Aa Aa Which of the following best explains why a firm that needs to borrow money would borrow at long-term rates when short-terms rates are lower than long-term rates? Firms will always be better off when they borrow using long-term financing even if the yield curve is upward-sloping. Short-term interest rates are more volatile than long-term interest rates. A firm will only borrow at short-term rates when the yield curve is upward-sloping. Credit ratings affect the yields on bonds. Based on the scenario described in the following table, determine whether yields will increase or decrease and whether it will be more expensive or less expensive, as compared to other players in the market, for a company to borrow money from the bond market. Cost of Borrowing Money from Bond Markets Scenario Impact on Yield XYZ Co.'s credit rating was downgraded from AA to BBB. A company's financial health improves. There is an increase in the perceived marketability of a company's bonds, so the liquidity premium decreases. A company uses debt to buy another company. Such an event is called a leveraged buyout Decrease Increase