Bank of Canada paper studies risk and debt maturity


A working paper published by the Bank of Canada (BoC), on August 27, models the relationship between debt maturity and systematic risk.

The paper highlights the trade-off between risk and cost when firms are considering issuing debt. It states that while a longer debt maturity reduces the risk of equity holders defaulting, long-term bonds are more expensive to issue than short-term bonds.

The authors, Hui Chen, Yu Xu and Jun Yang, find that firms with a higher systematic volatility in cashflows

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