The Primary Reason That Individuals and Firms Choose to Borrow

question 3

Multiple Choice

The primary reason that individuals and firms choose to borrow long-term is to

• A) reduce the risk that interest rates will fall before they pay off their debt.
• B) reduce the risk that interest rates will rise before they pay off their debt.
• C) reduce monthly interest payments, as interest rates tend to be higher on short-term than long-term debt instruments.
• D) reduce total interest payments over the life of the debt.

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Definitions:

Financial Position

A snapshot of the resources, obligations, and the net worth of an individual or organization at a specific point in time.

Nominal Rate

The stated interest rate of a loan or investment, not taking into account the effect of compounding.

Semiannually

Referring to an occurrence or event happening twice a year.

Maturity Date

The particular date when the last payment of a loan, bond, or another financial instrument must be made.