Two different individuals or companies can go to the same bank and request exactly the same amount of funding for their projects and yet can be required to pay different costs for their funds
Why? Can we find a parallel situation in the bond and equity markets? Explain.
What will be an ideal response?
Answer: Two different individuals or companies may not have the same resources to pay back the borrowed funds. The "riskier" borrower will most likely have to pay a higher cost for funds. In the bond market, we see these different rates as the different yields on bonds for different companies. In the equity market, we see these different rates as the different required returns for companies due to their different betas. In general, the cost of funds for an individual or company will be directly related to the lender's view of the risk of repayment of the funds.
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