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

question 41

Multiple Choice

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 7.1. 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.

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Definitions:

Dissolved

The process of officially ending the existence of a legal entity, such as a corporation or partnership.

Revised Uniform Limited Partnership Act

A set of laws adopted by some states to govern the formation, operation, and dissolution of limited partnerships.

Uniform Limited Liability Company Act

A comprehensive statute that provides a legal framework for the formation, operation, and dissolution of limited liability companies (LLCs) in the United States.

LLCs

Limited Liability Companies; a flexible form of enterprise that blends elements of partnership and corporate structures, offering limited liability protection to its owners.