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

question 17

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 #2 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:

Moral Conscience

An internal sense of right and wrong that guides an individual's actions and decisions.

Personality

The combination of characteristics or qualities that form an individual's distinctive character.

Rule Oriented

A characteristic of behaviors or individuals that strictly follow established guidelines or protocols.

Freud

Sigmund Freud, an Austrian neurologist, pioneered psychoanalysis, a therapeutic approach for addressing mental disorders through conversations between a psychoanalyst and their patient.