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

question 17

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 #2 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:

Parasympathetic Nerve Fibers

Components of the autonomic nervous system that help the body to relax and conserve energy, often referred to as the "rest and digest" system.

Nervous System

A complex network of nerves and cells that carry messages to and from the brain and spinal cord to various parts of the body.

Peripheral Nervous

A part of the nervous system consisting of the nerves and ganglia outside of the brain and spinal cord.

Autonomic Nervous

Part of the peripheral nervous system that controls involuntary functions of the body such as heart rate, digestion, and respiratory rate, comprising the sympathetic and parasympathetic nervous systems.