Instruction 15.1: for Following Problem(s), Consider These Debt Strategies Being Considered by Considered

question 7

Multiple Choice

Instruction 15.1:
For 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 15.1. 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.

---

Definitions:

Market Rate

The prevailing price in the market for goods or services, influenced by supply and demand dynamics.

Interest

The charge for borrowing money, typically expressed as an annual percentage rate, or the return earned on investments.

Sales Techniques

Strategies and methods used by sales professionals to promote and sell products or services effectively.

Delivery Vans

Vehicles specifically designed and used for the transportation of goods from a seller or distribution center to a destination point.