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

question 53

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. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. What is the risk of strategy #3? (Assume your firm is borrowing money.)

• A) Interest rates might go down or your credit rating might improve.
• B) Interest rates might go up or your credit rating might improve.
• C) Interest rates might go up or your credit rating might get worse.
• D) none of the above.

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A government program that provides monetary assistance to people with an inadequate or no income, especially the elderly, disabled, and unemployed.