Question
Botany Bay Corporation (BBC) of Australia seeks to borrow $1,000,000 in the Eurodollar market. Funding is needed for three years. Investigations leads to three possibilities
Botany Bay Corporation (BBC) of Australia seeks to borrow $1,000,000 in the Eurodollar market. Funding is needed for three years. Investigations leads to three possibilities or strategies as follows: 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%. Based on the above information choosing strategy #3 will:
guarantee the lowest average annual rate over the next three years. | ||
eliminate credit risk but retain repricing risk. | ||
maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. | ||
preclude the possibility of sharing in lower interest rates over the three-year period. |
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