Which of the Following Reasons for Considering Long-Term Loans Inherently

question 48

Multiple Choice

Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate?

• A)There is a greater chance that a borrower will default in a longer time-frame.
• B)The penalties for closing out a long term loan early make them unattractive to many investors.
• C)Long term loans typically have ongoing costs that accumulate over the life of the loan.
• D)The loan values are very sensitive to changes in market interest rates.

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Definitions:

Accounting Rate

The interest rate used in the process of accounting, particularly in discounting cash flows, which can affect the calculation of net present value or internal rate of return.

Hurdle Rate

The minimum rate of return required by management for an investment to be acceptable, used in budgeting and capital allocation decisions.

Internal Rate

This term is too broad without specific context, such as “Internal Rate of Return (IRR).” Assuming IRR, it is a financial metric used to estimate the profitability of potential investments.

Present Value

The today's value of a forthcoming sum of money or cash flow sequence, determined by a specific rate of return.