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

question 12

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. After the fact, under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.)

• A) Your credit rating stayed the same and interest rates went up.
• B) Your credit rating stayed the same and interest rates went down.
• C) Your credit rating improved and interest rates went down.
• D) Not enough information to make a judgment.

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Definitions:

Actual Reserves

The total funds a bank has in its vault or deposited with the central bank, available for immediate use.

Required Reserves

Required reserves refer to the minimum amount of funds that a bank must hold in reserve against deposits, as mandated by central banking regulations to ensure bank liquidity.

Excess Reserves

The reserves that banks hold over and above the regulatory requirements set by the central bank or banking regulator.

Excess Reserves

Banking reserves exceeding the reserve requirement set by a central bank, not lent out to the bank's clients.