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

question 9

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. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 is: (Assume your firm is borrowing money.)

• A) that interest rates might go down or that your credit rating might improve.
• B) that interest rates might go up or that your credit rating might improve.
• C) that interest rates might go up or that your credit rating might get worse.
• D) none of the above

---

Definitions:

Official Power

The legal authority vested in a person holding a governmental office or position to make decisions, enact policies, or command resources.

Political Party

A collective of individuals united by broadly similar political goals and views, aiming to impact governmental policy through the election of its members to positions of power.

Elected Office

A position within the government that is filled through the process of an election, where candidates are chosen by voters.

Nominating Process

The procedure through which political parties select and nominate their candidates for election to public office.