Instruction 9.1: For the Following Problem(s), Consider These Debt Strategies Being Considered

question 42

Multiple Choice

Instruction 9.1:
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 9.1. 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:

Dependency

A reliance on someone or something else for support or the proportion of non-working population to the working population.

Private Capital Flows

Financial resources that are invested in a country by private sector entities from other countries, including investments in equity, debt, and property.

Direct Foreign Investment

An investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets.

World Bank

A bank that lends (and guarantees loans) to developing countries to assist them in increasing their capital stock and thus in achieving economic growth.