- CFA Exams
- CFA Level I Exam
- Study Session 7. Corporate Finance (1)
- Reading 20. Capital Structure
- Subject 4. Practical issues in capital structure policy
CFA Practice Question
Which factors tend to cause a companies' debt maturity to be potentially longer? A country has:
II. Active bond and stock markets.
III. Taxes that favor debt.
IV. High inflation.
I. Large institutional investors.
II. Active bond and stock markets.
III. Taxes that favor debt.
IV. High inflation.
A. I, II and III
B. II and III
C. I, II, III and IV
User Contributed Comments 7
| User | Comment |
|---|---|
| pochuevalex | I've thought large institutional investors would prefer stocks rather then debt..... |
| chris76 | This isn't about stocks vs debt. It's about whether there is a market for long-term debt. Since institutional investors are more likely to buy 30 year bonds than individuals, more institutions = longer maturity. |
| aqibislam | Presence of large institutional investors more equity investment than debt so debt should be short term instead of being long term |
| udhay | why point 4 is incorrect, In a highly inflated economy the real value of debt repayment to stake holders is low, which is good for the company |
| cagratz | To point four, I guess you can read into the question and state that if you are in a country with high inflation, interest rates will likely be high. If you are in a country that has high expected inflation, you would take out longer duration debt. The question is fairly open for interpretation. |
| alejandroc | cagratz: yeah, but then credit could be scarcer, right? or less long-term oriented, in terms of supply |
| rjdelong | the answer is because countries with high inflation are unstable and it's harder to borrow in these countries, they are forced to use shorter term maturities to reduce the risk of default to the lender. more developed countries with better legal systems have longer maturities and higher levels of debt in their capital structures. |