A Higher Lending Rate or an Increase in Debt Principal

question 14

Multiple Choice

A higher lending rate or an increase in debt principal increases the probability of default because:

• A) creditors get more anxious to get repaid and therefore drive debtors into bankruptcy.
• B) the nation's repayment/default threshold is higher because the consumption level after repayment of principal and interest falls, whereas the default cost did not change.
• C) the bankers of the nation will not help because they can make more profitable loans to third-party borrowers.
• D) the government is adverse to repaying a debt that has existed for more than five years.

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Definitions:

Monthly Loan Payment

A fixed payment amount made by a borrower to a lender at a specified date each calendar month.

Facility

A physical or virtual space configured to serve a specific purpose, such as manufacturing, storage, or office work.

Present Value

The current value of a future sum of money or stream of cash flows, given a specific rate of return.

Discount Rate

During discounted cash flow analysis, this is the rate employed to determine the present value of anticipated future cash flows.