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

question 47

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 #1 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:

Uracil

A nitrogenous base found in RNA that pairs with adenine during RNA synthesis.

Nucleotide Bases

The building blocks of DNA and RNA molecules, consisting of adenine (A), cytosine (C), guanine (G), thymine (T), and uracil (U, in RNA).

RNA

Ribonucleic acid, a molecule essential for various biological roles, including coding, decoding, regulation, and expression of genes.

Translation

Translation is a biological process by which messenger RNA is decoded by a ribosome to produce a specific amino acid chain, or polypeptide, that will fold into an active protein.