Debt Financing Is Made Up of Explicit and Implicit Costs

question 48

Multiple Choice

Debt financing is made up of explicit and implicit costs which are:

• A)a higher required ROE and the interest rate bondholders demand, respectively.
• B)the interest rate bondholder's demand and a higher required ROE, respectively.
• C)the costs of equity and debt, respectively.
• D)the costs of issuing bonds and the interest rate bondholders demand, respectively.

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Definitions:

Silver

A precious metal used for investment, industrial applications, and jewelry, known for its conductivity and antibacterial properties.

Reserve Requirement Ratio

The fraction of deposits that banks must hold in reserve and not loan out, as mandated by central banking authorities.

Central Bank

An institution designed to oversee the banking system, regulate the quantity of money in the economy, and provide various financial services to the government.

Treasury Bonds

Long-term government debt securities with a fixed interest rate, considered low-risk investments.