Debt and Bankruptcy
Investing and Financial Markets
Investment Banking

Why would the cost of debt increase if the risk-free rate increase?

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Wiki User
July 17, 2008 11:09AM

The rate of return on a security, in this case the debt, is defined by rd = rRF + Liquidity Premium + Maturity Risk Premium + Default Risk Premium Thus increasing the risk free rate (rRf) should increase the cost of debt. Hopefully that answers your question...