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:

Milgram Obedience Studies

A series of social psychology experiments conducted by Stanley Milgram, demonstrating people's willingness to follow orders from an authority figure, even to the extent of causing harm to others.

Electric Shocks

Sudden discharges of electricity through a part of the body, used either as a therapeutic tool or as a result of accidental contact with electricity.

"Learner"

An individual who is actively engaged in the process of acquiring knowledge, skills, or understanding through study, experience, or teaching.

Stanley Milgram

A psychologist best known for his seminal research on obedience to authority, which demonstrated that people are willing to obey authority figures to a surprising degree, even when asked to perform actions conflicting with their personal conscience.