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.

---

Definitions:

Double-Blind Experiment

A study in which neither the participants nor the experimenters know who is receiving a particular treatment, used to eliminate bias.

Confounded

A situation in statistical analysis where the effect of one variable on an outcome cannot be separated from the effect of another variable, potentially leading to misleading conclusions.

Biased

Showing an unreasonable like or dislike for a person based on personal opinions.

Response Variable

A variable (often denoted as Y) that represents the outcome or the effect in a study or experiment, influenced by the explanatory variables.