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

question 6

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. After the fact, under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.)

• A) Your credit rating stayed the same and interest rates went up.
• B) Your credit rating stayed the same and interest rates went down.
• C) Your credit rating improved and interest rates went down.
• D) Not enough information to make a judgment.

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Definitions:

Probability

A measure of the likelihood that an event will occur, expressed as a number between 0 and 1.

Stratified Random Sample

A sampling method that divides the population into strata, or subgroups, and selects random samples from each stratum to ensure representation.

Statistic

A numerical measurement describing some characteristic of a sample, used to infer properties of the population from which it was drawn.

Parameter

A quantity that defines certain characteristics of a system or function, often used in mathematical or statistical models.