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

question 54

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 #3 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:

Zygote

The initial cell formed when a sperm cell fertilizes an egg cell, marking the beginning of human development.

Female Ovum

A female reproductive cell or gamete, which, when fertilized by a male sperm, can develop into a zygote.

Zygote

The initial cell formed when a new organism is produced by the union of sperm and egg cells, representing the earliest stage of development.

Uterine Wall

The muscular and membranous layer surrounding the uterus that thickens during the menstrual cycle to prepare for possible implantation.