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

question 13

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. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #2 is (Assume your firm is borrowing money.)

• A)that interest rates might go down or that your credit rating might improve.
• B)that interest rates might go up or that your credit rating might improve.
• C)that interest rates might go up or that your credit rating might get worse.
• D)none of the above

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Definitions:

Financial Crisis

A situation in which the value of financial institutions or assets drops rapidly, leading to a loss of wealth and uncertainty in financial markets.

Classical Conditioning

A learning process that occurs through associations between an environmental stimulus and a naturally occurring stimulus, leading to a learned response.

Respondent Behavior

Respondent behavior refers to automatic responses elicited by specific stimuli, often seen in classical conditioning scenarios.

Spontaneous Recovery

The reappearance of a previously extinguished response after a period of no exposure to the conditioned stimulus.