Question

If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm's CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.

A. True
B. False

Answer 1

A. True

Explanation:

As per the given situation, if the yield curve is sloping upwards, it indicates that short-term interest rates are smaller than long-term interest rates.

In this case the bonds have an opposite relationship between the bond price and interest rates and If the short-term rates are lower then the value of the short-term bonds which includes the current liabilities, is higher. Short term bonds are loans to be settled in one.

As we know that

Current ratio = Current assets - Current liabilities

Current liabilities include short-term debt, hence the short-term value is higher as a result of a low current ratio.

Therefore the given statement is true