Instruction 8.1: For the Following Problem(s), Consider These Debt Strategies Being Considered

question 47

Multiple Choice

Instruction 8.1:
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 8.1. Choosing strategy #1 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:

Joint Property

Property owned by two or more parties under joint tenancy, tenancy in common, or other arrangement where ownership is shared.

Shared Profits

Profits distributed among stakeholders or partners of a business venture based on a predetermined formula or agreement.

Gross Returns

The total financial gains received from an investment before any deductions are made for expenses, taxes, or losses.

Limited Liability Partnerships (LLPs)

A business structure where partners have limited personal liability for the debts of the partnership.