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

question 28

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. 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:

Optimum Solution

The most favorable or desirable solution among a set of outcomes, typically involving the maximization of benefits or minimization of costs.

Classical Decision Model

A theory that outlines how decisions should be made, assuming perfect information and a rational, logical approach.

Clearly Defined

Clearly stated, easy to understand, and precisely outlined characteristics or boundaries of a concept or object.

Satisfactory Solution

A resolution or answer to a problem that meets the minimum requirements or expectations of the involved parties.