For the following problems 26 thru 29, 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%.

26) Refer to the above. Choosing strategy #2 will:

A) eliminate credit risk but retain repricing risk.

B) guarantee the lowest average annual rate over the next three years.

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.

27) Refer to the above. Which strategy (strategies) will eliminate credit risk?

A) Strategy #1

B) Strategy #2

C) Strategy #3

D) Strategies #1 and #2

28) Refer to the above. If your firm felt very confident that interest rates would fall or, at worst, remain at current levels, and were very confident about the firm's credit rating for the next 10 years, which strategy would you likely choose? (Assume your firm is borrowing money.)

A) Strategy #2

B) Strategy #3

C) Strategy #1

D) Strategy #1, #2, or #3; you are indifferent among the choices.

29) Refer to the above. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 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