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

threeyear

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

oneyear

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.)

Question content area bottom

Part 1

A. that interest rates might go up or that your credit rating might improve.

B. that interest rates might go up or that your credit rating might get worse.

C. that interest rates might go down or that your credit rating might improve.

D. none of the above