AFM391 Chapter Notes - Chapter 12: Current Liability, Liquidity Risk, Credit Risk

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Financial leverage: quantifies the relationship between the relative level of a firm"s debt and its equity base, measure of solvency. Shareholders have an opportunity to increase roe when the business performs well but exposes them to more risk. Debt-rating agencies: assesses creditworthiness of bond issuers, agency"s assessment of the borrower"s ability to pay the obligation when due, reduce information asymmetry between bond issuers and investors which can reduce the cost of finance. Independent and impartial evaluation to assist investors in making educated decisions: the higher the ranking, the lower the perceived probability of default, aaa to d. Financial liabilities: contractual obligations to deliver cash or other financial assets to another party at a future date. Interest rate on loans is higher than the rate they pay to deposits: offer a safe place for deposits, companies sell notes directly to reduce or eliminate the spread.

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