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

question 22

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. If your firm felt very confident that interest rates would fall or, at worst, remain at current levels, and were very confident about the firm's credit rating for the next 10 years, which strategy would you likely choose? (Assume your firm is borrowing money.)

• A) Strategy #3
• B) Strategy #2
• C) Strategy #1
• D) Strategy #1, #2, or #3; you are indifferent among the choices.

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Definitions:

OASDI

The Old-Age, Survivors, and Disability Insurance program, part of Social Security in the United States, funded through payroll taxes.

Hospital Insurance

A type of health insurance coverage that pays for hospitalization expenses, surgeries, and other medical procedures.

OASDI

Old-Age, Survivors, and Disability Insurance; the official name for Social Security in the United States.

Hospital Insurance

A type of health insurance specifically designed to cover the costs of hospitalization and related medical expenses.