The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium.
A default-free bond is a bond in which the bond issuer would not miss scheduled payments of either the coupon or principal. Bonds issued by the government are generally considered to be default-free. This is because the government can print money to make payments.
A bond with a default risk is a bond in which the bond issuer can miss scheduled payments of either the coupon or the principal. Bonds issued by private individuals are generally considered to be bonds with default risk.
Bondholders usually demand a compensation for holding bonds with a default risk. This compensation is known as risk premium.
Risk premium = return on bonds with default risk - return on default- free bond.
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Answer:
D. international diversification
Explanation:
The Multinational corporations can reduce their risk by international diversification and reduced risk can increase debt capacity of MNC. The higher capacity to meet scheduled debt payment also reduces cost of capital.
The effect of international diversification on capital structure can be explained through
1. Co-insurance effect: Combining businesses with international firms provides reduction in operating risk and thereby increase debt capacity. This helps MNCs to include more debts in their capital structure.
2. Transaction cost theory. Internationalization is a way of internatilize intangible assets. Since intangible assets are not difficult to sale , international diversification helps MNCs to exploit their intangible assets. So MNCs with an eye of international diversification will try to develop these type of assets in their asset base.
3.Agency cost argument: MNCs will have high agency costs Diversification helps to reduce these agency costs International diversification creates larger markets and generates growth opportunities. Growth opportunities and debt ratios are inversely proportional .MNCs with higher growth opportunities will rely on equity rather than debt.
Answer:
12.64%
Explanation:
In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below
Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)
= 4% + 0.87 × 7.4%
= 4% + 6.438%
= 10.438%
The Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is applied.
Now the required rate of return would be
= 10.438% + 2.2%
= 12.64%
The above situation is an example of shoe leather cost of inflation.
A shoe-leather cost is what people pay when they frequently visit the bank to withdraw cash to use to pay for products in the wake of intense inflationary pressure. The term "shoe-leather cost" symbolizes all costs, including time spent, bank fees, brokerage fees and transportation costs.
High inflation discourages people from keeping large sums of cash on hand because the value of money rapidly depreciates during this time. More money is kept in banks by them. Additionally, repeated price increases force people to constantly withdraw money for transactional needs. Due to this, they frequently visit their bank to withdraw cash in order to pay for goods and services. These frequent journeys degrade their shoe leather, resulting in a 'shoe-leather cost.'
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