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

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Definitions:

Operant Behavior

Behavior that is controlled by its consequences, in the context of operant conditioning, whereby reinforcements or punishments shape behavior patterns.

Successive Approximation

A behavioral psychology principle where behaviors are gradually shaped to approximate the desired behavior closer and closer.

Self-Control

The capacity to control feelings, ideas, and actions when confronted with desires and sudden urges.

Therapeutic Techniques

A variety of methods and strategies used in psychological therapy to help individuals overcome challenges, modify behaviors, and improve mental health.