Instruction 8.1: For the Following Problem(s), Consider These Debt Strategies Being Considered

question 29

Multiple Choice

Instruction 8.1:
For the following problem(s) , consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
• Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
• Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
• Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1. Choosing strategy #3 will:

• A) guarantee the lowest average annual rate over the next three years.
• B) eliminate credit risk but retain repricing risk.
• C) maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks.
• D) preclude the possibility of sharing in lower interest rates over the three-year period.

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Definitions:

Cross-sectional

Pertaining to a research design that examines a data sample or multiple samples at one specific point in time.

Sequential Method

A research or problem-solving technique that involves proceeding through a series of steps in order, one after the other.

Developmental Research Designs

Research methods used to examine changes in behavior or abilities over time, typically used in psychological and educational studies.

Panel Study

A type of longitudinal study where data are collected from the same subjects at multiple points in time, useful for identifying trends and changes.