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

question 46

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. 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:

Work Performance

The level of efficiency and effectiveness with which job duties and responsibilities are carried out by an employee.

Transformational Chain

A concept in change management, referring to the sequence of steps or activities that collectively support the complete transformation of an organization towards a desired state.

Specific Sequence

A particular order in which a set of actions or processes occur, often critical to achieving desired outcomes.

Raw Materials

Basic materials extracted from the environment or produced through farming that are used in the creation of goods and services.